Question

Stock M has a beta of 1.2. The market risk premium is 7.8 percent
and the risk-free rate is 3.6 percent. Assume you compile a
portfolio equally invested in Stock M, Stock N, and a risk-free
security that has a portfolio beta equal to the overall market.
What is the expected return on the portfolio?

a.) 11.2%
b.) 10.8%
c.) 10.4%
d.) 11.4%
e.) 11.7%

Answer 1

Portfolio return= Riskfree Rate+Beta of Portfolio* Market Risk Premium

Portfolio Return= 3.6%+1*7.8%

Portfolio Return= 3.6%+7.8%

Portfolio Return= 11.4%

Answer D