Assume that you hold a well-diversified portfolio that has an expected return of 11.0% and a...

Assume that you hold a well-diversified portfolio that has an expected return of 11.0% and a beta of 1.20. You are in the process of buying 1,000 shares of Alpha Corp at $10 a share and adding it to your portfolio. Alpha has an expected return of 21.5% and a beta of 1.70. The total value of your current portfolio is $90,000. What will the expected return and beta on the portfolio be after the purchase of the Alpha stock? Do not round your intermediate calculations.

Solutions

Expert Solution

Value of alpha purchase = price*shares = 1000*10= 10000

Total New portfolio value = Value of Old portfolio + Value of Alpha

=90000+10000

=100000

Weight of Old portfolio = Value of Old portfolio/Total New portfolio Value

= 90000/100000

=0.9

Weight of Alpha = Value of Alpha/Total New portfolio Value

= 10000/100000

=0.1

Expected return of New portfolio = Weight of Old portfolio*Expected return of Old portfolio+Weight of Alpha*Expected return of Alpha

Expected return of New portfolio = 11*0.9+21.5*0.1

Expected return of New portfolio = 12.05

Total New portfolio value = Value of Old portfolio + Value of Alpha

=90000+10000

=100000

Weight of Old portfolio = Value of Old portfolio/Total New portfolio Value

= 90000/100000

=0.9

Weight of Alpha = Value of Alpha/Total New portfolio Value

= 10000/100000

=0.1

Beta of New portfolio = Weight of Old portfolio*Beta of Old portfolio+Weight of Alpha*Beta of Alpha

Beta of New portfolio = 1.2*0.9+1.7*0.1

Beta of New portfolio = 1.25

jeff jeffy answered 10 months ago

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