The expected return on Alpha Inc.is 8.0% and the expected return on Beta Inc.is 24.0%.What is the trade-off between investing in Alpha and Beta if the portfolio weight in Alpha is increased by 1%?
A)-0.08%
B)-0.16%
C)-0.24%
D)-0.32%

Question

Quizplus · Accepted Answer

The trade-off between investing in Alpha and Beta when increasing the portfolio weight in Alpha by 1% is calculated by the difference in their expected returns multiplied by the change in weight. The expected return on Alpha is 8.0%, and on Beta is 24.0%, so the difference is 24.0% - 8.0% = 16.0%. A 1% increase in the weight in Alpha (and a corresponding decrease in Beta) would lead to a 0.16% (16.0% * 1%) decrease in the expected return, hence -0.16%.

The Expected Return on Alpha Inc