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Suppose UPS has a beta of 1.6, and PepsiCo has a beta of 0.9. The risk-free...

Suppose UPS has a beta of 1.6, and PepsiCo has a beta of 0.9. The risk-free rate of interest is 6% and the market risk premium is 9%. What would be the expected return on a portfolio with 60% of its money in UPS and the balance in PepsiCo?

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Answer #1

Required return of UPS = Risk free rate + beta (market risk premium)

Required return of UPS = 0.06 + 1.6 ( 0.09)

Required return of UPS = 0.204 or 20.4%

Required return of Pepsico = Risk free rate + beta (market risk premium)

Required return of Pepsico = 0.06 + 0.9 ( 0.09)

Required return of Pepsico = 0.141 or 14.1%

Expected return on portfolio = 0.6*0.204 + 0.4*0.141

Expected return on portfolio = 0.1224 + 0.0564

Expected return on portfolio = 0.1788 or 17.88%

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