Register
UPS, a delivery services company, has a beta of 1.4, and Wal-Mart has a beta of 0.8. The risk-free rate of interest is 4% and the market risk premium (rM-rRF) is 6%. What is the expected return on a portfolio
179,893 views
10 votes
10 votes
UPS, a delivery services company, has a beta of 1.4, and Wal-Mart has a beta of 0.8. The risk-free rate of interest is 4% and the market risk premium (rM-rRF) is 6%. What is the expected return on a portfolio with 40% of its money in UPS and the balance in Wal-Mart?

User Khilo
by
2.7k points

1 Answer

18 votes
18 votes

Answer:

10.24%

Step-by-step explanation:

the expected return on a portfolio can be determined using CAPM

According to the capital asset price model: Expected rate of return = risk free + beta x (market rate of return - risk free rate of return)

Beta of the portfolio = (percentage of UPS in portfolio x beta of UPS) + (percentage of Wal-mart in portfolio x beta of Wal - Mart )

(1.4 x 0.4) + (0.8 x 0.6)

= 0.56 + 0.48

= 1.040

Expected return = 4% + (1.040 x 6%) = 10.24%

User Vkreddy
by
3.1k points
Ask a Question
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

1.6m questions

2.0m answers

Other Questions

If the rate of inflation in Japan dramatically increases while the rate of inflation in the United States remains constant, then a. the demand curve for dollars shifts to the left. b. the demand curve
If you buy a one-year bond for $4,000 and the issuer pays you back $5,000 at the end of one year, the interest rate on the bond is
Kylie is risk averse and has $1,000 with which to make a financial investment. She has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option
From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that Group of answer choices bond interest is deductible for tax purposes. interest must be
In January of the current year, Dora made a gift of stock to her granddaughter. At the time of the gift, the stock was worth $15,000. Several months later in the same year after the gift, a $500 dividend
Link Copied!