Stock XYZ has a beta of 1.2 and an expected return of 14%; the risk-free asset (T-bills) currentlyearns 4%. What is the expected return on a portfolio if 50% of your money is invested in Stock XYZand 50% in T-bills?
A) 8%
B) 18%
C) 9%
D) 14%

Question

Quizplus · Accepted Answer

Using the formula for calculating expected return on a portfolio with two assets: 
Expected return = (weight of asset 1 x expected return of asset 1) + (weight of asset 2 x expected return of asset 2)

Expected return = (0.5 x 14%) + (0.5 x 4%)
Expected return = 9%

Therefore, the expected return on the portfolio is 9%. Choice C is the correct answer.

Stock XYZ Has a Beta of 1