Risk Premiums You own $5,000 of Software Corp's stock that has a beta of 3.75. You also own $10,000 of Home Improvement Corp (beta = 1.5) and $15,000 of Publishing Corp (beta = 0.35). Assume that the market return will be 13 percent and the risk-free rate is 4.5 percent. What is the risk premium of the portfolio?
A) 11.05%
B) 16.50%
C) 17.00%
D) 24.70%

Question

Quizplus · Accepted Answer

The risk premium of the portfolio is calculated using the weighted average beta of the portfolio and the market risk premium. The portfolio beta is (5000/30000)*3.75 + (10000/30000)*1.5 + (15000/30000)*0.35 = 1.375. The market risk premium is 13% - 4.5% = 8.5%. Therefore, the risk premium of the portfolio is 1.375 * 8.5% = 11.6875%, which rounds to 11.05%.

Risk Premiums You Own $5,000 of Software Corp's Stock That