A stock that you are interested in has a beta of 5

Finance Dec 23, 2020

A stock that you are interested in has a beta of 5. The total value of your portfolio is $200,000 and you decide to invest another $50,000 in this stock.

a. The current beta of your portfolio is 2.5. What will be the beta of your new portfolio?

b. The risk-free rate is 6% and the expected return on the market is 15%. What is the expected return on your new portfolio?

Expert Solution

1.
=Sum(Amount in Stock i*Beta of Stock i)/Sum(Amount in Stock i)
=(200000*2.5+50000*5)/(200000+50000)=3.00
2.
=risk free rate+beta*(market return-risk free rate)
=6%+(200000*2.5+50000*5)/(200000+50000)*(15%-6%)=33.00%

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