You own $7,000 of Diner's Corp. stock that has a beta of 1.75. You also own $13,000 of Comm Corp. (beta = 1.15) and $20,000 of Airlines Corp. (beta = 0.7). Assume that the market return will be 12 percent and the risk-free rate is 3.5 percent. What is the total risk premium of the portfolio?
A) 8.76 percent
B) 8.86 percent
C) 10.20 percent
D) 12.36 percent

Question

Quizplus · Accepted Answer

The portfolio beta is calculated as a weighted average of the individual betas: (7000/40000)*1.75 + (13000/40000)*1.15 + (20000/40000)*0.7 = 1.025. The risk premium is the portfolio beta times the market risk premium (market return - risk-free rate): 1.025 * (12% - 3.5%) = 8.76%.

You Own $7,000 of Diner's Corp