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You hold $70,000 of Nike stock and $30,000 of Microsoft stock. Assume that Nike's beta is 0.69 and MSFT's beta is 1.26. What is the β of your portfolio? Assume that the risk-free rate is 3.9% and the expected return on the market is 9.9%. What is the expected return of your portfolio?

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hyderali230

Answer:

Expected rate of return of portfolio is 9.1%

Explanation:

Portfolio β = (Nike beta x weightage of Nike) + (Microsoft beta x weightage of Microsoft)

Portfolio β = ( 0.69 x 70,000 / 100,000 ) + ( 1.26 x 30,000 / 100,000 )  

Portfolio β = 0.861

We will calculate the expected rate of return by using the formula of CAPM for Expected rate of return

Expected Rate of return = Risk free rate + beta ( Market premium )

Expected Rate of return = 3.9% + 0.861 ( 9.9% - 3.9% )

Expected Rate of return = 3.9% + 5.166% = 9.066% = 9.1%