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AURORKA [14]
3 years ago
6

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 th

e 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?
Business
1 answer:
11111nata11111 [884]3 years ago
7 0

Answer:

16.62%

Explanation:

First, use CAPM to find the expected return of each stock;

r= risk free + beta (market risk premium)

<u>UPS;</u>

r = 0.06 +(1.6*0.09)

r = 0.204 or 20.4%

<u>Walmart;</u>

r = 0.06 + (0.9*0.09)

r = 0.141 or 14.1%

Next find the return of portfolio;

Let  UPS be represented by <em>U </em>and Wal-Mart by <em>W</em>

rP = wU*rU + wW*rW

P= portfolio

w= weight of...

r = return of....

rP = (0.40*0.204) + (0.60 * 0.141)

rP = 0.0816 + 0.0846

rP = 0.1662 or 16.62%

Therefore, the expected return on a portfolio  is 16.62%

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