Question

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What is the expected return of a portfolio with two stocks that has 3,900 shares of stock A, which has a price of 32.8 dollars per share and an expected return of 9.09 percent, and 62,200 dollars of stock B, which has a beta of 1.39? The market has an expected return of 15.13 percent, the inflation rate is 2.16 percent, and the risk-free rate is 5.94 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. Number

Answer 1

Stock B

As per CAPM

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

Expected return% = 5.94 + 1.39 * (15.13 - 5.94)

Expected return% = 18.71

MV of stock A = price*shares = 32.8*3900 = 127920

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

=127920+62200

=190120

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

= 127920/190120

=0.6728

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

= 62200/190120

=0.3272

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 = 9.09*0.6728+18.71*0.3272

Exp return of Portfolio = 12.24