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 21.5% and a beta of 1.70. 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? Do not round your intermediate calculations.

Answer 1

Step-by-step explanation:

Investment value in alpha = $10,000

Weight of alpha in total investment = 10%

Expected return:

= 11%×0.90+21.5%×0.10

= 12.05%

Beta of portfolio:

= 1.2×0.90+1.7×0.10

= 1.08+ 0.17

=1.25