You are an investor in common stock, and you currently hold a well-diversified p

Question

You are an investor in common stock, and you currently hold a well-diversified portfolio which has an expected return of 12 percent, a beta of 1.2, and a total value of $ 17 ,000. You plan to increase your portfolio by buying 100 shares of AT&E at $ 32 a share. AT&E has an expected return of 15 percent with a beta of 1.7. What will be the expected return of your portfolio after you purchase the new stock? Enter your answer to the nearest .1%. Also enter your answer as a whole number, thus 12.4% would be 12.4 rather than .124.

Explanation / Answer

Pervious portfolio value = $17,000

Additional amount to portfolio = 100 shares x $32 = $3200

New Portfolio value = $20,200

Expected rate = 12% x $17,000 / $20,200 + 15% x $3,200/ $20,200 = 12.4752%

Expected rate = 12.5 percent

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