Question

Assume that you hold a well-diversified portfolio that has an expected return of 12.0% and a beta of 1.20. You are in the process of buying 100 shares of Alpha Corp at $10 a share and adding it to your portfolio. Alpha has an expected return of 15.0% and a beta of 2.00. The total value of your current portfolio is $9,000. What will the expected return and beta on the portfolio be after the purchase of the Alpha stock?

Answer 1

Expected return of portfolio = 12.3%

Beta of portfolio = 1.28

Step-by-step explanation:

investment value in alpha = 100*10 = $1000

Total value of portfolio = 9000 + 1000 = $10000

The expected return and beta would be the weighted average.

Expected return of portfolio = 9000/10000 * 12% + 1000/10000 * 15%

Expected return of portfolio = 12.3%

Beta of portfolio = 9000/10000 * 1.20 + 1000/10000 * 2

Beta of portfolio = 1.28