Assume that you hold a well-diversified portfolio that has an expected return of
ID: 2753292 • Letter: A
Question
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 20.5% and a beta of 0.80. 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?
Answers:
11.23% and 0.95
12.07% and 1.32
10.04% and 0.88
11.95% and 1.16
14.22% and 1.00
Explanation / Answer
Weigthted Average Exp Return =
$ 90,000 / ($ 10000 + $ 90000) x 11% = 9.9% (+)
$10,000 / ($10,000+$(90,000) x 20.5% = 2.05%
= 11.95%
Weighted Average Beta =
$ 90,000 / ($ 10000 + $ 90000) x 1.2 = 1.08 (+)
$10,000 / ($10,000+$(90,000) x 0.8 = 0.08
= 1.16 Beta