In: Finance
Consider a portfolio consisting of 2 assets, a share with a beta of 0.9 and market risk premium of 15%, and a risk-free asset with an expected return of 4%. If the portfolio weighting is 40% of shares and 60% of the risk-free asset what is the expected return on the portfolio?
a. 10.6%
b. 9.4%
c. 8.4%
d. 7.69%
Expected rate on share=risk free rate+Beta*market risk premium
=4+(0.9*15)
=17.5%
Expected return on risk free rate=4%[Beta of risk free assets=0]
Portfolio return=Respective return*Respective weight
=(0.4*17.5)+(0.6*4)
=9.4%