You hold a diversified portfolio consisting $95,000 of common stocks. The portfo

Question

You hold a diversified portfolio consisting $95,000 of common stocks. The portfolio beta is equal to 1.15. It has an expected return of 10%. You are going to buy $5,000 of stock in a steel company whose beta is 2.0. Stocks for this steel company are expected to have a return of 16%. 1. a. What will be the expected return of your portfolio after the purchase of the steel stocks? 10.3% b. What will be the beta for your portfolio after the purchase of the steel stocks? 1.19 Assume that the risk-free rate is 6% and the expected market return is 13%, what is the portfolio's required rate of return after the purchase of the steel stocks? (Hint: Use the beta in part b.) 14.33%

Explanation / Answer

1.

a.

expected return of portfolio

=weight of common stock*expected return+weight of steel stock*expected return

=(95000/(95000+5000))*10%+(5000/(95000+5000))*16%

=10.3%

b.

beta of the portfolio

=weight of common stock*beta+weight of steel stock*beta

=(95000/(95000+5000))*1.15+(5000/(95000+5000))*2.0=1.19

c.

required return of portfolio=risk free rate+beta*(market return-risk free rate)

=6%+1.19*(13%-6%)

=14.33%

the above is answer..

we can do only one question based on Chegg rule

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