You live in an Eichler-built house in Cupertino California.You admire Apple so much that it is the only stock that you want in your portfolio.You have $100,000 of your own money to invest and you intend to buy more Apple on margin by borrowing an additional $40,000.Your broker will lend to you at the risk free rate,5%,and has guaranteed the lending rate for the duration of your investment.Apple's expected return is 12% and the expected return on the market is 8%.Apple's beta is 1.25.What beta do you expect from your portfolio?
A) 1.25
B) 1.45
C) 1.55
D) 1.65
E) 1.75

Question

Quizplus · Accepted Answer

Your investment is $100,000. The portfolio weight on the Apple position is: w_i = 11ea7fdb_fc0a_e8fe_a768_311adba0f837_TB2902_11 = 11ea7fdb_fc0a_e8ff_a768_b97bae919009_TB2902_11 = 1,4 The margin loan is risk free (guaranteed by the broker) so it is equivalent to a short position in the risk free asset. Thus, its beta is zero. β_p = w₁β₁ + . . . + w_nβ_n β_p = (w)1.25 + (1 - w)0 β_p = 1.4 × 1.25 = 1.75

You Live in an Eichler-Built House in Cupertino California