A portfolio is diversified . It has an expected return of 11.0% and a beta of 1.

Question

A portfolio is diversified . It has an expected return of 11.0% and a beta of 1.10. You want to add 300 shares of Tundra Corporation at $40 a share to your portfolio. Tundra has an expected return of 13.0% and a beta of 1.50. The total value of the investor's current portfolio is $45,000. a. Calculate the expected return on the portfolio after the purchase of the Tundra stock? b. Calculate the expected beta on the portfolio after you add the new stock? c. Is your portfolio less risky or more risky than average? Explain. d. Will your portfolio likely outperform or underperform the market in a period when stocks are rapidly falling in value? . Is beta always an accurate predictor of a portfolio's performance? Explain?

Explanation / Answer

Hi, If you like my answer rate me lifesaver first...that way only I can earn points. Thanks a) Expected total return on tundra = $40 * 300 * 13% = $1560 Total expected return = $1560 * $45000 *11% = $6510 b) new beta = 45000 / (45000 + 12000) * 1.1 + 12000/(45000 + 12000) * 1.5 = 1.18 c) since beta > 1 so it is more risky than average d) underperform because of beta > 1 e) no, but it is an valid indicator or predictor. It may happen that the stock to act reversely, because of the market sentiments.

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