Question

You own a portfolio that is invested 35 percent in Stock X, 20 percent in Stock Y, and 45 percent in Stock Z. The expected returns on these three stocks are 9 percent, 15 percent, and 12 percent, respectively. What is the expected return on the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Portfolio expected return ſ

Answer 1

Question 1:

Expected return on portfolio = Weight1 * Rate1 + Weight2 * Rate2 + Weight3 * Rate3

Expected return on portfolio = 35% * 9% + 20% * 15% + 45% * 12%

Expected return on portfolio = 3.15% + 3.00% + 5.40%

Expected return on portfolio = 11.55%

Question 2:

Based on CAPM,

Expected return on stock = Risk free rate + Beta * (Expected market return - Risk free rate)

Expected return on stock = 3.1% + 1.15 * (10.3% - 3.1%)

Expected return on stock = 11.38%