Question

66% of Roger's portfolio is stock of Netflix. The rest is in stock of Target. Netflix's beta is 1.68, and Target's beta is 0.52. The current risk-free rate is 2%, and the expected return for the S&P 500 is 8%. What is the expected return of Roger's portfolio?

Answer 1

To calculate the expected return of Roger's portfolio, we need to use the following formula:

Expected return = Risk-free rate + Beta * (Expected return of the market - Risk-free rate)

First, we need to find the weight of Target in Roger's portfolio. Since 66% is in Netflix, then 100% - 66% = 34% is in Target.

Next, we can find the beta of Roger's portfolio by using the following formula:

Beta of portfolio = Weight of Netflix * Beta of Netflix + Weight of Target * Beta of Target

Beta of portfolio = 0.66 * 1.68 + 0.34 * 0.52 = 1.24

Now, we can calculate the expected return of Roger's portfolio:

Expected return = 2% + 1.24 * (8% - 2%) = 9.92%

Therefore, the expected return of Roger's portfolio is 9.92%.