You are an investor in common stock,and you currently hold a well-diversified portfolio which has an expected return of 12 percent,a beta of 1.2,and a total value of $9,000.You plan to increase your portfolio by buying 100 shares of AT&E at $10 a share.AT&E has an expected return of 20 percent with a beta of 2.0.What will be the expected return and the beta of your portfolio after you purchase the new stock?

Question

Quizplus · Accepted Answer

First, we need to calculate the new total value of the portfolio after buying AT&E stock:
100 shares x $10/share = $1,000
New total value = $9,000 + $1,000 = $10,000

Next, we need to calculate the expected return of the portfolio after buying AT&E stock:
Expected return = (Expected return of original portfolio x Total value of original portfolio + Expected return of new stock x Value of new stock) / New total value
Expected return = (0.12 x $9,000 + 0.20 x $1,000) / $10,000
Expected return = 0.13 or 13%

Finally, we need to calculate the beta of the new portfolio:
Beta = (Beta of original portfolio x Total value of original portfolio + Beta of new stock x Value of new stock) / New total value
Beta = (1.2 x $9,000 + 2.0 x $1,000) / $10,000
Beta = 1.32

Therefore, the expected return and beta of the new portfolio after buying AT&E stock are 13% and 1.32, respectively. Choice B is the correct answer.

You Are an Investor in Common Stock,and You Currently Hold