Question

ups, a delivery services company, has a beta of 1.1, and walmart has a beta of 0.7. the risk-free rate of interest is 4% and the market risk premium is 7%. what is the expected return on a portfolio with 30% of its money in ups and the rest in walmart?

Answer 1

The expected return on a portfolio with 30% in UPS and 70% in Walmart is calculated using the Capital Asset Pricing Model (CAPM), resulting in a combined expected return of 9.74%.

Step-by-step explanation:

To calculate the expected return on a portfolio with a mixture of UPS and Walmart stock, we use the Capital Asset Pricing Model (CAPM) to find the expected returns for each stock and then combine them based on the portfolio weights.

The expected return of UPS using CAPM is:

ReturnUPS = Risk-free rate + (BetaUPS × Market risk premium)

ReturnUPS = 4% + (1.1 × 7%) = 11.7%

The expected return of Walmart using CAPM is:

ReturnWalmart = Risk-free rate + (BetaWalmart × Market risk premium)

ReturnWalmart = 4% + (0.7 × 7%) = 8.9%

The expected return of the portfolio is:

ReturnPortfolio = (WeightUPS × ReturnUPS) + (WeightWalmart × ReturnWalmart)

ReturnPortfolio = (0.30 × 11.7%) + (0.70 × 8.9%) = 3.51% + 6.23% = 9.74%

Therefore, the expected return on a portfolio with 30% of its money in UPS and the rest in Walmart is 9.74%.