An investor currently has all of his wealth in Treasurybills. He is considering

Question

An investor currently has all of his wealth in Treasurybills. He is considering investing one-third of his funds inGeneral Electric, whose beta is 1.3, with the remainder left inTreasury bills. The expected risk-free rate (Treasury Bills)is 6% and the market risk premium is 8.8%. Determine the betaand the expected return on the proposed portfolio. An investor currently has all of his wealth in Treasurybills. He is considering investing one-third of his funds inGeneral Electric, whose beta is 1.3, with the remainder left inTreasury bills. The expected risk-free rate (Treasury Bills)is 6% and the market risk premium is 8.8%. Determine the betaand the expected return on the proposed portfolio.

Explanation / Answer

using CAPM, expected return of General Electric = risk free rate+ beta*market risk premium = 6% +1.3 *8.8% =17.44%
so the expected return of the portfolio = 1/3 *17.44% + 2/3 *6 %= 9.81%

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