Kelly has investments with the following characteristics in her portfolio: Investment In Beta Amount Invested Stock...

Kelly has investments with the following characteristics in her portfolio:

Investment In	Beta	Amount Invested
Stock Q	1.2	$10,000
Stock R	2.1	$20,000
Stock S	0.89	$20,000

Given the risk free rate of 3% and the market return of 8%, what is the expected rate of return of Kelly’s investment portfolio?

Expert Solution

Amount Invested in Stock Q = $10,000
Amount Invested in Stock R = $20,000
Amount Invested in Stock S = $20,000

Total Investment = Amount Invested in Stock Q + Amount Invested in Stock R + Amount Invested in Stock S
Total Investment = $10,000 + $20,000 + $20,000
Total Investment = $50,000

Weight of Stock Q = Amount Invested in Stock Q / Total Investment
Weight of Stock Q = $10,000 / $50,000
Weight of Stock Q = 0.20

Weight of Stock R = Amount Invested in Stock R / Total Investment
Weight of Stock R = $20,000 / $50,000
Weight of Stock R = 0.40

Weight of Stock S = Amount Invested in Stock S / Total Investment
Weight of Stock S = $20,000 / $50,000
Weight of Stock S = 0.40

Portfolio Beta = Weight of Stock Q * Beta of Stock Q + Weight of Stock R * Beta of Stock R + Weight of Stock S * Beta of Stock S
Portfolio Beta = 0.20 * 1.20 + 0.40 * 2.10 + 0.40 * 0.89
Portfolio Beta = 1.436

Portfolio Required Return = Risk-free Rate + Portfolio Beta * (Market Return - Risk-free Rate)
Portfolio Required Return = 3.00% + 1.436 * (8.00% - 3.00%)
Portfolio Required Return = 3.00% + 1.436 * 5.00%
Portfolio Required Return = 10.18%

jeff jeffy answered 1 year ago

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