Purchase Solution

# Expected Return and Stock Portfolios

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(1) The risk-free rate of return is currently 5 percent, whereas the market risk premium is 11 percent. If the beta of Briar Tek's stock is 2, then what is the expected return on Briar Tek?

(2) A stock portfolio is equally allocated among Stock A, B, and C. Stocks A, B, and C have betas of 1.9, 1, and 0.57, respectively. The market has just risen 4%. What would you expect to happen to this stock portfolio?

A. The stock portfolio will rise 3.8%.
B. The stock portfolio will rise 4%.
C. The stock portfolio will rise 4.6%.
D. The stock portfolio will rise 5%.

##### Solution Summary

This solution explains how to compute the expected return based on the risk-free rate of return and the market risk premium, and how to estimating the percentage increase in value of a stock portfolio based on the held stocks' betas and the percentage of general market increase.

##### Solution Preview

(1) The risk-free rate of return is currently 5 percent, whereas the market risk premium is 11 percent. If the beta of Briar Tek's stock is 2, then what is the expected return on Briar Tek?

Expected ...

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