UPS, a delivery services company, has a beta of 1.6, and Wal-Mart has a beta of 0.9. The risk-free rate of interest is 6% and the market risk premium is 9%. What is the expected return on a portfolio with 40% of its money in UPS and the balance in Wal-Mart?

Question

Quizplus · Accepted Answer

C) Compute portfolio beta by multiplying weight of each stock by its beta.
Use CAPM to compute expected return of the portfolio.
(0.4 × 1.6) + (0.6 × 0.9) = 1.18; 6% + (1.18 × 9%) = 16.62%

UPS, a Delivery Services Company, Has a Beta of 1