You own a portfolio that has a total value of 103,000 dollars. The portfolio has

Question

You own a portfolio that has a total value of 103,000 dollars. The portfolio has 5,000 shares of stock A, which is priced at 8.3 dollars per share and has an expected return of 8.25 percent. The portfolio also has 20,000 shares of stock B, which has an expected return of 19.14 percent. The risk-free return is 3.51 percent and inflation is expected to be 1.64 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

Total value of the portfolio = 103000 dollars

Total value of stock A portfolio = 5000*8.3 = 41500

Totl valeu of stock B = 103000-41500= 61500

Expected Return = 41500/103000 *8.25% + 61500/10300* 19.14 =14.75%

risk premium = Expected return -risk free return

=14.75% -3.51%

= 11.24%

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