Assume that you hold a. diversified 90,000 portfolio with a beta of 1.20 and that you...

Assume that you hold a. diversified 90,000 portfolio with a beta of 1.20 and that you are in the process of buying 1000 shares of a high tech stock at $10 a share with beta of 1.70 and adding it to this portfolio. also assume that risk free rate is 2% and that the expected rate of return on the market is 10.0% based of the CAPM what would be the expected rate of return. for your portfolio after the purchase of this stock

Solutions

Expert Solution

Step 1: Portfolio Beta

The beta of a portfolio is the weighted average beta of the securities which constitute the porfolio

	Weight	Beta	*WeightBeta**
Portfolio	0.90(90000/(1000*10)	1.20	1.08
High tech stock	0.10(1-.9)	1.70	0.17

Portfolio Beta = Weight*Beta

= 1.08+.17

= 1.25

Using Capital Asset Pricing Model

Expected Rate of Return = Rf + b ( Rm – Rf )

Where,

Rf – Risk free return = 2%

b – Beta = 1.25

Rm – Expected return on market portfolio = 10%

Expected Rate of Return = 2+1.25*(10-2)

= 2+1.25*8

= 2+10

= 12.00%

jeff jeffy answered 2 months ago

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