Use the following information to answer the next two questions:Myrna has $175,000 invested in a stock that has a beta of 0.6 and $400,000 invested in a stock with a beta of 1.4. The return on the market is 11 percent, and the risk-free rate of return is 4.5 percent.
Show ALL your work.
a) If these are the only two investments in her portfolio, what is her portfolio's beta? Round your answer to two decimal places.
b) Use the capital asset pricing model to find the expected return on the portfolio.
Total investment=(175000+400,000)=$575000
1.Portfolio beta=Respective betas*Respective weights
=(175000/575000*0.6)+(400000/575000*1.4)
=1.16(Approx).
2.Expected return=risk-free rate +Beta*(MArket rate- risk-free rate )
Expected return of stock investment of $175000=4.5+0.6*(11-4.5)
=8.4%
Expected return of stock investment of $400,0000=4.5+1.4*(11-4.5)
=13.6%
Hence expected return of portfolio=Respective return*Respective weights
=(175000/575000*8.4)+(400,000/575000*13.6)
which is equal to
=12.02%(Approx).
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