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Expected return and beta for Tundra Corporation

Your portfolio is diversified. It has an expected return of 10.0% and a beta of 1.10. You want to add 200 shares of Tundra Corporation at $30 a share to your portfolio. Tundra has an expected return of 14.0% and a beta of 1.50. The total value of the investor's current portfolio is $18,000.
a. Calculate the expected return on the portfolio after the purchase of the Tundra stock?
b. Calculate the expected beta on the portfolio after you add the new stock?
c. Is your portfolio less risky or more risky than average? Explain.
d. Will your portfolio likely outperform or underperform the market in a period when stocks are rapidly falling in value?
e. Is beta always an accurate predictor of a portfolio's performance? Explain?

Solution Preview

a. Calculate the expected return on the portfolio after the purchase of the Tundra stock?

Expected return = Sum (Proportion X Return)
Presently portfolio has a value of 18,000 and return of 10%
Tundra stock has a value of 200 X 30 = $6,000 and return of 14%
With the Tundra stock, the total value is now 24,000
Proportion of current portfolio = 18,000/24,000 = 0.75
Proportion of Tundra = 6,000/24,000 = 0.25
Expected return on portfolio with Tundra = 0.75 X 10% + 0.25 X 14% = 11%

b. Calculate the expected ...

Solution Summary

The solution explains how to calculate the expected return and beta of a portfolio after addition of a new stock

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