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7 May, 08:38

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?

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  1. 7 May, 08:52
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    16.62%

    Explanation:

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

    r = risk free + beta (market risk premium)

    UPS;

    r = 0.06 + (1.6*0.09)

    r = 0.204 or 20.4%

    Walmart;

    r = 0.06 + (0.9*0.09)

    r = 0.141 or 14.1%

    Next find the return of portfolio;

    Let UPS be represented by U and Wal-Mart by W

    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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