Question

Assume that you hold a well-diversified portfolio that has an expected return of 10.0% and a beta of 1.50. You are in the process of buying 2,000 shares of Omega Corp at $10 a share and adding it to your portfolio. Omega has an expected return of 15.0% and a beta of 1.75. The total value of your current portfolio is $80,000. What will the expected return and beta on the portfolio be after the purchase of the Omega stock

Answer 1

Based on the expected returns and beta of the portfolio and investment, after the purchase of omega stock, the expected return is 11% and the beta is 1.55.

What is the expected return?

Find the value of the Omega stock:

= 2,000 x 10

= $20,000

The total value of the new portfolio is:

= 80,000 + 20,000

= $100,000

Expected value is:

= (80,000 / 100,000 x 10%) + (20,000 / 100,000 x 15%)

= 8% + 3%

= 11%

What is the beta?

= (80,000 / 100,000 x 1.50) + (20,000 / 100,000 x 1.75)

= 1.2 + 0.35

= 1.55

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