Question

You have one risk-free asset and one risky stock in your portfolio. The risk-free asset has...

You have one risk-free asset and one risky stock in your portfolio. The risk-free asset has an expected return of 5.8 percent. The risky stock has a beta of 1.8 and an expected return of 12.3 percent. What's the expected return on the portfolio if the portfolio beta is .958?

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Answer #1

Answer:

Expected Return = Risk free rate + Beta * Market risk premium
0.123 = 0.058 + 1.8 * Market Risk Premium
0.123 – 0.058 = 1.8 * Market Risk Premium
0.065 = 1.8 * Market Risk Premium
Market Risk premium = 0.065 / 1.8
Market Risk Premium = 0.0361

Expected Return on portfolio = Risk free rate + Beta on Portfolio * Market Risk premium
Expected Return on Portfolio = 0.058 + 0.958 * 0.0361
Expected Return on Portfolio = 0.058 + 0.0346
Expected Return on Portfolio = 0.0926 or 9.26%

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