Question

1. You own a portfolio of two stocks, O and Q. Stock O is valued at $4,000 and has an expected return of 10.5 percent. Stock Q has an expected return of 18.7 percent. What is the expected return on the portfolio if the portfolio total value is $5,000?

   		11.73 percent
   		10.92 percent
   		12.14 percent
   		13.03 percent

1. Cornel Co. has a beat of 1.4. If the risk-free rate is 3% and the market return is 12%, what is its cost of equity assume CAPM?

   		18.0%
   		16.5%
   		15.6%
   		17.6%

Answer 1

a)	12.14 percent
	Stock	INVESTMENT (i)	Return (ii)	Investment* Return (i)* (ii)
	O	4,000	10.5%	420.00
	Q	1,000	18.7%	187.00
	Total	5,000		607.00
	Expected return =	(Investment * Return) / Total Investment * 100
		607 / 5000 * 100
		12.14%

b)	15.6%
	CAPM Return =	Risk free Return + (Market Return - Risk free return)* Beta
	CAPM Return =	3% + (12% - 3%) * 1.4
	CAPM Return =	15.6%