Assume you stock portfolio is comprised of: 60% of your total is in a computer c
ID: 2717954 • Letter: A
Question
Assume you stock portfolio is comprised of: 60% of your total is in a computer company stock (that has a beta of 1.3, the risk-free rate is 5%, and the expected return on the market as a whole is 11%); and 40% of your total is in the petrolium company stock (that has a beta of 1.3, the risk free rate is 5%, and the market risk premium is 11%). Calculate:
a. The expected return for you computer company stock.
b. The expected return for you petroleum company stock.
c. The expected weighted return for you portfolio.
Explanation / Answer
a).Expected Return of Computer Company Stock = Risk free Rate +Beta of Computer Company
Stock(Expected return Market- Risk free Rate)
= .05+1.3(.11-.05)
= .05+.078
= .128 = 12.8%
b).Expected Return of Petroleum Company Stock= Risk free Rate +Beta of Petroleum Company
Stock(Expected return Market- Risk free Rate)
= .05+1.3(.11-.05)
= .05+.078
= .128 = 12.8%
c). Expected Return on Port folio = .60*.128+.40*.128
= 0.0768 + 0.0512
= 0.128 = 12.8%
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