Portfolio Equity Expected Stock Weight Beta ( b E ) Return ( r E ) 1 15% 1.10 6.
ID: 2637067 • Letter: P
Question
Portfolio Equity Expected
Stock Weight Beta ( bE ) Return ( rE )
1 15% 1.10 6.10%
2 40% 0.90 5.10%
3 45% 1.30 7.10%
Suppose you have three stocks in your portfolio. You have allocated your
money as shown below. If the risk free rate is 0.60% and the market risk
premium ( rm
Explanation / Answer
Expected Return of Stock 1 = .6% + 1.1* 5% = 6.1%
Expected Return of Stock 2 = .6% + .9*5% = 5.1%
Expected Return of Stock 3 = .6% + 1.3*5% = 7.1%
portfolio return = .15*6.1% + .40*5.1% + .45*7.1%
= 6.15%