Question

In: Finance

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.

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 1 year ago

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