Calculating the expected return and beta of a portfolio after buying a new stock
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You have a portfolio with a total value of $9,000 which has an expected return of 12% with a beta of 1.2. You plan to buy $1,000 of a stock with an expected return of 20% and a beta of 2.0. What will be the expected return and beta of the portfolio after purchasing the new stock?
a) 12.0%, 1.2
b) 12.8%, 1.28
c) 13.2%, 1.4
d) 14.0%, 1.32
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Solution Summary
The solution shows in a very easy to understand way the steps required to calculate expected return and beta of a portfolio of stocks. The steps are standard. However, the OTA does a great job of explaining the concepts and steps. The solution can be very easily understood by anyone who has some basic knowledge.
Solution Preview
Treat the current portfolio as one stock of $9000 with a beta of 1.2 and an expected return of 12%.
With an addition of $1000, the total portfolio value becomes $10000.
Let Ep = ...
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