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    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 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 = ...

    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.