Homework Answers
Expected return=risk free rate+beta*market risk premium
1.
A=5%+1.05*17%=22.85000%
B=5%+0.85*17%=19.45000%
2.
=40%*22.85%+(1-40%)*19.45%=20.81000%
3.
=40%*1.05+(1-40%)*0.85=0.9300
4.
Higher beta means higher market or non diversifiable or systematic
risk
Hence, for a well diversified portfolio, addition of Share A will
mean higher risk
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