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UPS, a delivery services company, has a beta of 1.4, and Wal-Mart has a beta of 0.8. The risk-free rate of interest is 4% and the market risk premium (rM-rRF) is 6%. What is the expected return on a portfolio with 40% of its money in UPS and the balance in Wal-Mart?

Sagot :

Answer:

10.24%

Explanation:

the expected return on a portfolio can be determined using CAPM

According to the capital asset price model: Expected rate of return = risk free + beta x (market rate of return - risk free rate of return)

Beta of the portfolio = (percentage of UPS in portfolio x beta of UPS) + (percentage of Wal-mart in portfolio x beta of Wal - Mart )

(1.4 x 0.4) + (0.8 x 0.6)

= 0.56 + 0.48

= 1.040

Expected return = 4% + (1.040 x 6%) = 10.24%

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