Jaime is going to purshase two stocks to form the initial holdings in is portfol

Question

Jaime is going to purshase two stocks to form the initial holdings in is portfolio. Iron stock has an expected return of 15%, while Copper stock has an expected return of 20%. If Jaime plans to invest 30% of his funds in Iron and the remainder in Copper, what will be the expected return from his portafolio? What if Jaime invests 70% of his funds in Iron stock?

(CAPM) The market risk premium is 6% and the risk free market is 5%. If the expected retuen on a bond is 6.5%, what is its beta? Show your work.

Explanation / Answer

Expected retuurn = 15x0.3 + 20x0.7 = 18.5%

Expected return if 70% is invested in Iron = 15x0.7 + 20x0.3 = 16.5%

expected return = risk free rate + beta(market rate - risk free rate)

0.065 = 0.05 + beta (0.06-0.05)

0.015 = beta x 0.01

1.5 = beta

Beta measures the degree of risk of an asset.

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