Question

You are given the information on three stocks.

Stock	Expected Return	Number of Shares	Stock Price	Beta
A	9%	750	$33	1.5
B	14%	220	$51	1.2
C	12%	460	$19	0.95

Suppose you borrow 70% of your funds at 6% interest rate and invest the borrowed funds as well as the funds you already have in the portfolio incorporating the three stocks. What is the expected return on this portfolio?

a.   12.914%

b.   14.228

c.   16.65%

d.   10.80%

e.   13.16%

What is the answer and its steps?

Answer 1

Stock	No. of Shares	Stock Price	Invested Amount	70% amt Borrowed	Total value after borrowed amount (a)	Expected return (b)	Total Return from Stock (a)*(b)
A	750	33	24750	17325	42075	9%	3786.75
B	220	51	11220	7854	19074	14%	2670.36
C	460	19	8740	6118	14858	12%	1782.96
			44710	31297	76007		8240.07

Total 70% of the borrowed amount = $31297

Interest rate on it = 6%

Total Interest on Borrowed amount = $31297*6% = $1877.82

Total return from Stock = $ 8240.07

Net return from Stock = Total return from Stock - Total Interest on Borrowed amount

= $ 8240.07 - $ 1877.82

= $ 6362.25

Expected return from Portfolio = (Net Return from Stock/Invested amount)*100

= (6362.25/44710)*100

= 14.23%

Hence, Option B. 14.228% (answer difference due to rounding off)