Question

You own a portfolio that has a total value of 126,000 dollars. The portfolio has 6,000 shares of stock A, which is priced at 7.3 dollars per share and has an expected return of 8.62 percent. The portfolio also has 10,000 shares of stock B, which has an expected return of 14.46 percent. The risk-free return is 4.68 percent and inflation is expected to be 2.38 percent. What is the risk premium for your portfolio? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Answer 1

Value in stock B = portfolio-price of stock A*shares in stock A

=126000-6000*7.3=82200

Value in stock A = portfolio-Value in stock B = 126000-82200=43800

Total Portfolio value = Value of Stock A + Value of Stock B

=43800+82200

=126000

Weight of Stock A = Value of Stock A/Total Portfolio Value

= 43800/126000

=0.3476

Weight of Stock B = Value of Stock B/Total Portfolio Value

= 82200/126000

=0.6524

Expected return of Portfolio = Weight of Stock A*Expected return of Stock A+Weight of Stock B*Expected return of Stock B

Expected return of Portfolio = 8.62*0.3476+14.46*0.6524

Expected return of Portfolio = 12.4299

risk premium = expected return-risk free rate = 12.4299-4.68= 7.75 = 0.0775