CSL, a pharmaceutical company, has a beta of 1.5, and Woolworths has a beta of 0.9. The risk-free rate of interest is 4% and the market risk premium is 7%. What is the expected return on a portfolio with 30% of its money in CSL and the balance in Woolworths?

Question

Quizplus · Accepted Answer

The expected return on a portfolio is calculated using the weighted average of the expected returns of the individual assets. The expected return for each stock is calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * Market Risk Premium. For CSL: 4% + 1.5 * 7% = 14.5%. For Woolworths: 4% + 0.9 * 7% = 10.3%. The portfolio return is 0.3 * 14.5% + 0.7 * 10.3% = 11.56%.

CSL, a Pharmaceutical Company, Has a Beta of 1