Question

Assume that you are going to invest $120,000 in a two asset portfolio. You will invest $80,000 in the fully diversified market portfolio and the remainder of your funds will be invested in the riskless security. Assume the market risk premium is 8% and the riskless return is 4%. Compute the expected return on this portfolio.

Answer 1

9.33

Step-by-step explanation:

The computation of the expected return on the portfolio is given below:

Given that the investment of $80,000 is made in full diversified market portfolio so the beta is 1

And, the rest should be the riskless security so the beta will be zero

Now the expected rate of return is

For $80,000

= 4 + 8 × 1

= 12%

For $40,000

= 4 + 8 × 1

= 4%

Now the Expected Return of the Portfolio is

= Respective returns × respective weights

= 12 × ($80,000 ÷ $120,000) + 4 × ($40,000 ÷ $120,000)

= 8 + 1.33

= 9.33