UPS, a delivery services company, has a beta of 1.1, and Wal-Mart has a beta of 0.7. 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 UPS and the balance in Wal-Mart?

Question

Quizplus · Accepted Answer

A) Compute portfolio beta by multiplying weight of each stock by its beta ).
Use CAPM to compute expected return of the portfolio.
(0.3 × 1.1) + (0.7 × 0.7) = 0.82; 4% + (0.82 × 7%) = 9.74%

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