A friend says that she expects to earn 13.00% on her portfolio with a beta of 2.

Question

A friend says that she expects to earn 13.00% on her portfolio with a beta of 2.25. You have a two-asset portfolio including stock X and a risk-free security. The expected return of Stock X is 10.00% and the beta is 1.60. The expected return on the risk-free security is 3.50%. If you construct your portfolio so that its beta is equal to the beta on your friends portfolio, then what is the expected return of your portfolio? A friend says that she expects to earn 13.00% on her portfolio with a beta of 2.25. You have a two-asset portfolio including stock X and a risk-free security. The expected return of Stock X is 10.00% and the beta is 1.60. The expected return on the risk-free security is 3.50%. If you construct your portfolio so that its beta is equal to the beta on your friends portfolio, then what is the expected return of your portfolio?

Explanation / Answer

Expected Return = Rf + Beta x (Market return - Risk Free Rate)
Assuming Friend's return is equal to market Return.
New expected return = 3.50% + 2.25 x (13%-3.50%) = 24.875%

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