1A. A stock has a beta of 1.7, the expected return on the market is 12 percent,

Question

1A. A stock has a beta of 1.7, the expected return on the market is 12 percent, and the risk-free rate is 5 percent. The expected return on this stock must be ______ percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

1B. You are contemplating a $100,000 investment portfolio containing three different assets. You plan to invest $20,000, $50,000, and $30,000 in assets A, B, and C, respectively. A, B, and C have expected annual returns of 15%, 16%, and 5%, respectively. What is the expected return of this portfolio?

Explanation / Answer

1.expected return =Risk free rate+Beta*(MArket rate-Risk free rate)

=5+1.7*(12-5)=16.9%

2. expected return of this portfolio=Respective returns*Respective investment weights

=(20,000/100,000*15)+(50,000/100,000*16)+(30,000/100,000*5)

which is equal to

=12.5%

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