CSL, a pharmaceutical company, has a beta of 1.2, and Woolworths has a beta of 0.8. The risk-free rate of interest is 4% and the market risk premium is 7%. What is the expected return on a portfolio with 40% of its money in CSL and the balance in Woolworths?

Question

Quizplus · Accepted Answer

The expected return on the portfolio is calculated using the Capital Asset Pricing Model (CAPM) for each stock and then finding the weighted average. CSL's expected return is 12.4% and Woolworths' is 9.6%. The portfolio return is 40% * 12.4% + 60% * 9.6% = 10.72%.

CSL, a Pharmaceutical Company, Has a Beta of 1