Your mother's well-diversified portfolio has an expected return of 12.0% and a beta of 1.20. She is in the process of buying 100 shares of Safety Corp. at $10 a share and adding it to her portfolio. Safety has an expected return of 15.0% and a beta of 2.00. The total value of your current portfolio is $9,000. What will the expected return and beta on the portfolio be after the purchase of the Safety stock?
Rp bp
A) 11.69%; 1.22
B) 12.30%; 1.28
C) 12.92%; 1.34
D) 13.56%; 1.41
E) 14.24%; 1.48

Question

Quizplus · Accepted Answer

Old portfolio return$ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $12.04$
Old portfolio beta$ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $1.20$
New stock return$ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $$ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $  $ 15.0\% $ 
NeW stock beta Percent of portfolio in new stock:$ \quad $ $ \quad $ $ \quad $ $2.00$
Percent of portfolio in new stock:$ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ 10 \% $ 
New expected portfolio return = rp = 0.1 × 15% + 0.9 × 12% = 12.30% New expected portfolio beta = bp = 0.1 × 2.00 + 0.9 × 1.20 = 1.28

Your Mother's Well-Diversified Portfolio Has an Expected Return of 12