Question

Your investment portfolio has 5,000 shares of Fairfax Paint, which has an expected return of 11.92 percent and a price of 5.2 dollars per share, and 25,000 shares of Litchfield Design, which has a price of 2.8 dollars per share. If your portfolio has an expected return of 14.4 percent, then what is the expected return for Litchfield Design? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Cher owns a portfolio that has a value of 67,600 dollars and consists of 3 stocks. It has 23,900 dollars worth of stock A, which has a beta of 0.49; it has 1,800 shares of stock B, which has a share price of 8 dollars and a beta of 1.29; and it has some stock C, which has a beta of 1.57. What is the beta of Cher’s portfolio? Round your answer to 2 decimal places (for example, 2.89, 0.70, or 1.00).

Answer 1

Answer to Question 1:

Fairfax Paint:

Amount invested = Number of shares * Price per share
Amount invested = 5,000 * $5.20
Amount invested = $26,000

Litchfield Design:

Amount invested = Number of shares * Price per share
Amount invested = 25,000 * $2.80
Amount invested = $70,000

Total investment = Amount invested in Fairfax Paint + Amount invested in Litchfield Design
Total investment = $26,000 + $70,000
Total investment = $96,000

Weight of Fairfax Paint = Amount invested in Fairfax Paint / Total investment
Weight of Fairfax Paint = $26,000 / $96,000
Weight of Fairfax Paint = 0.27083

Weight of Litchfield Design = Amount invested in Litchfield Design / Total investment
Weight of Litchfield Design = $70,000 / $96,000
Weight of Litchfield Design = 0.72917

Expected Return of Portfolio = Weight of Fairfax Paint * Expected Return of Fairfax Paint + Weight of Litchfield Design * Expected Return of Litchfield Design
0.1440 = 0.27083 * 0.1192 + 0.72917 * Expected Return of Litchfield Design
0.1440 = 0.03228 + 0.72917 * Expected Return of Litchfield Design
0.11172 = 0.72917 * Expected Return of Litchfield Design
Expected Return of Litchfield Design = 0.1532 or 15.32%