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You own a portfolio that has a total value of 134,000 dollars. The portfolio has 6,000...

You own a portfolio that has a total value of 134,000 dollars. The portfolio has 6,000 shares of stock A, which is priced at 7.1 dollars per share and has an expected return of 10.62 percent. The portfolio also has 10,000 shares of stock B, which has an expected return of 14.15 percent. The risk-free return is 4.74 percent and inflation is expected to be 2.93 percent. What is the risk premium for your portfolio? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

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Answer #1

Answer:
Portfolio Value = $134,000

Numbers of Stock A = 6,000 Shares
Price per share = $7.10
Value of Stock A = 6,000 * $7.10
Value of Stock A = $42,600

Weight of Stock A = $42,600 / $134,000
Weight of Stock A = 0.3179

Weight of Stock B = 1 – 0.3179
Weight of Stock B = 0.6821

Portfolio Return = (Weight of Stock A * Return on Stock A) + (Weight of Stock B * Return on Stock B)
Portfolio Return = (0.3179 * 10.62%) + (0.6821 * 14.15%)
Portfolio Return = 13.03%

Portfolio Risk Premium = Portfolio Return - Risk-free Rate
Portfolio Risk Premium = 13.03% - 4.74%
Portfolio Risk Premium = 8.29%

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