Question

What is the expected return of a portfolio with two stocks that has 2,300 shares of stock A, which has a price of 38.2 dollars per share and an expected return of 5.21 percent, and 86,200 dollars of stock B, which has a beta of 1.63? The market has an expected return of 12.39 percent, the inflation rate is 1.81 percent, and the risk-free rate is 4.74 percent. 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

MV of stock A = price*shares = 38.2*2300=87860

Expected return on stock B

As per CAPM

expected return = risk-free rate + beta * (expected return on the market - risk-free rate)

Expected return% = 4.74 + 1.63 * (12.39 - 4.74)

Expected return% = 17.21

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

=87860+86200

=174060

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

= 87860/174060

=0.5048

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

= 86200/174060

=0.4952

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

Exp return of Portfolio = 5.21*0.5048+17.21*0.4952

Exp return of Portfolio = 11.1528 = 0.1115