Question

a. Your investment portfolio contains 200 shares of Dollarama and 450 shares of Dollar Tree. The price of Dollarma is currently $92 per share, and the price of Dollar Tree  is currently $11 per share. If you expect the return on Dollarama to be 6% in the next year, and the return on Dollar Tree to be 8%, what is the expected return for your portfolio?

b. Henry's stock has a beta of 0.9, while Sandyshore stock has a beta of 1.35. If the risk-free rate is 2%, and the market risk premium is 8%, what is the expected return on a portfolio with equal holdings of Henry's and Sandyshore?

Answer 1

Expected Ret from Portfolio = Weighted Avg Ret of securities in That Portfolio.

Security	Investemnt	Weight	Ret	Wtd Ret
Dollarama	$ 18,400.00	0.7880	6.00%	4.73%
Dollar Tree	$   4,950.00	0.2120	8.00%	1.70%
Portfolio Ret				6.42%

Part B:

Required Ret = Rf + Beta ( RiskPremium)

Henry:

Req Ret = 2% + 0.9 ( 8%)

= 2% + 7.2%

= 9.2%

Sandyshore:

Req Ret = 2% + 1.35 ( 8%)

= 2% + 10.8%

= 12.8%

Expected Ret of Portfolio with equal weight:

Security	Weight	Ret	Wtd Ret
Henry	0.5000	9.20%	4.60%
Sandyshore	0.5000	12.80%	6.40%
Portfolio Ret			11.00%