Risk Premiums You own $5,000 of Software Corp's stock that has a beta of 3.75.You also own $10,000 of Home Improvement Corp.(beta = 1.5)and $15,000 of Publishing Corp.(beta = 0.35).Assume that the market return will be 13 percent and the risk-free rate is 4.5 percent.What is the risk premium of the portfolio?
A)11.05 percent
B)16.50 percent
C)17.00 percent
D)24.70 percent

Question

Quizplus · Accepted Answer

The portfolio beta is calculated as a weighted average of the individual betas: (5000/30000)*3.75 + (10000/30000)*1.5 + (15000/30000)*0.35 = 1.375. The risk premium is then calculated as the portfolio beta multiplied by the market risk premium (market return - risk-free rate): 1.375 * (13% - 4.5%) = 11.05%.

Risk Premiums You Own $5,000 of Software Corp's Stock That