Question

If you have a $500,000 portfolio with a beta of 2.2, should you add $30,000 of a stock with a beta of 1.1 and an expected return of 10.5% if the risk-free rate is 3% and the market risk premium is 6%? A. Yes B. NoYou have a $90,000 portfolio with a beta of 1.4. Should you add $10,000 of a new stock with a beta of 0.8 and an expected return of 7.2% if the risk-free rate is 2% and the expected return on the market is 8%? A. Yes B. No

Answer 1

required return=risk free+beta*market risk premium

1. Yes

=3%+1.1*6%=9.6%

As expected return is more than the required return, we should add the stock

2. No

=2%+1.4*8%=13.2%

As expected return is less than the required return, we should not add the stock