You hold the positions in the following table.What is the beta of your portfolio? If you expect the market to earn 12 percent and the risk-free rate is 3.5 percent,what is the required return of the portfolio?
A) 14.21 percent
B) 16.76 percent
C) 13.97 percent
D) 15.38 percent

Question

You hold the positions in the following table.What is the beta of your portfolio? If you expect the market to earn 12 percent and the risk-free rate is 3.5 percent,what is the required return of the portfolio? 
A) 14.21 percent 
B) 16.76 percent 
C) 13.97 percent 
D) 15.38 percent

Quizplus · Accepted Answer

Total value = 100 × (40 + 30 + 50 + 20) = $14,000.
Amazon.com weight = $40 × 100/$14,000 = 28.6%.
Family Dollar weight = $30 × 100/$14,000 = 21.4%.
McKesson weight = $50 × 100/$14,000 = 35.7%.
Schering-Plough weight = $20 × 100/$14,000 = 14.3%.
Now compute the portfolio beta = 0.286 × 3.8 + 0.214 × 1.2 + 0.357 × 0.4 + 0.143 × 0.5 = 1.56.
So the portfolio's required return = 3.5% + 1.56 × (12% − 3.5%) = 16.76%.

You Hold the Positions in the Following Table