Question

ABC's well-diversified portfolio has an expected return of 12.0% and a beta of 1.20. She is in the process of buying 100 shares of XYZ Corp. at $20 a share and adding it to her portfolio. XYZ has an expected return of 15.0% and a beta of 1.80. The total value of your current portfolio is $8,000. What will the expected return and beta on the portfolio be after the purchase of the XYZ stock?

A. 12.60%; 1.32

B. 12.40%; 1.30

C. 12.50%; 1.31
D. 12.30%; 1.28

Answer 1

Total Value of Current Portfolio = $8000

Current Portfolio's beta = 1.20

Current Portfolio's expected Return = 12%

- 100 shares of XYZcorp is added in the current portfolio at $20 per share

Total Value of XYZ corp = 100 shares*$20 per share

= $2000

XYZ has an expected return of 15.0% and a beta of 1.80

Calculating the Expected return of portfolio after XYZ corp:-

Expected return = (Expected return of Current Portfolio)(Weight of current portfolio) + (Expected return of XYZ Corp.)(Weight of XYZ Corp.)

= (12%)[$8000/($8,000 + $2,000)] + (15%)[$2000/($8,000 + $2,000)]

= 9.60% + 3%

= 12.60%

Calculating the Beta of portfolio after XYZ corp:-

Beta = (Beta of Current Portfolio)(Weight of current portfolio) + (Beta of XYZ Corp.)(Weight of XYZ Corp.)

= (1.20)[$8000/($8,000 + $2,000)] + (1.80)[$2000/($8,000 + $2,000)]

= 0.960% + 0.36

= 1.32

Option A

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