You own a portfolio that has a total value of 101,000 dollars. The portfolio has

Question

You own a portfolio that has a total value of 101,000 dollars. The portfolio has 8,000 shares of stock A, which is priced at 9.9 dollars per share and has an expected return of 8.62 percent. The portfolio also has 10,000 shares of stock B, which has an expected return of 19.71 percent. The risk-free return is 3.31 percent and inflation is expected to be 1.76 percent. What is the risk premium for your portfolio? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Explanation / Answer

Shares Market price Market Value Weightage in portfolio stock A 8000 9.9 79200 0.7842 stock B 10000 2.18 21800 0.2158 101000 Inflation Adjusted portfolio Return = (Return of Stock A*Weightage of stock A) + (Return of Stock B*Weightage of stock B) (1+inflation rate) = (8.62 * 0.7842) + (19.71 * 0.2158) 1.0176 = 10.8196 Risk Premium = Inflation Adjusted portfolio Return - Risk free rate of return = 0.10819 -   0.0331 Risk Premium = 0.075

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