Question

You own a portfolio that has a total value of 118,000 dollars. The portfolio has 8,000 shares of stock A, which is priced at 9.3 dollars per share and has an expected return of 11.97 percent. The portfolio also has 10,000 shares of stock B, which has an expected return of 15.29 percent. The risk-free return is 4.22 percent and inflation is expected to be 1.98 percent. What is the risk premium for your portfolio? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Answer 1

Total investment = $118,000

Investment in stock A = Number of shares * Price per share
Investment in stock A = 8,000 * $9.30
Investment in stock A = $74,400

Investment in stock B = Total investment - Investment in stock A
Investment in stock B = $118,000 - $74,400
Investment in stock B = $43,600

Weight of stock A = Investment in stock A / Total investment
Weight of stock A = $74,400 / $118,000
Weight of stock A = 0.63051

Weight of stock B = Investment in stock B / Total investment
Weight of stock B = $43,600 / $118,000
Weight of stock B = 0.36949

Portfolio expected return = Weight of stock A * Expected return of stock A + Weight of stock B * Expected return of stock B
Portfolio expected return = 0.63051 * 0.1197 + 0.36949 * 0.1529
Portfolio expected return = 0.1320

Portfolio risk premium = Portfolio expected return - Risk-free rate
Portfolio risk premium = 0.1320 - 0.0422
Portfolio risk premium = 0.0898