23. An investor currently has all of his wealth in Treasury bills. He is conside

Question

23. An investor currently has all of his wealth in Treasury bills. He is considering investing 30% of his funds in General Electric, whose beta is 2.50, with the remainder left in Treasury bills. GE has an expected return of 18% and Treasury bills have an expected return of 2%. What are the investor’s portfolio beta and portfolio expected return?

A. Portfolio beta = 1.45, and portfolio expected return = 5.4%

B. Portfolio beta = 0.75, and portfolio expected return = 6.8%

C. Portfolio beta = 0.75, and portfolio expected return = 5.4%

D. Portfolio beta = 1.45, and portfolio expected return = 6.8%

Explanation / Answer

Weight of investment in treasury bills = 0.70

Expected return = Risk free return + Beta ( Market return - Risk free return )

0.18= 2%+2.50(Market return -0.02)

0.18=2% +2.50 Market return - 0.05

0.18-0.02 +0.05 = 2.50 Market return

0.21=2.50 Market return

Market return = 8.4%

Expected return of portfolio = 0.02*0.70+0.18*0.30

= 0.014+0.054

= 6.8%

Beta of portfolio = 1.45

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