J.R. has a three stock portfolio. Details of the portfolio are provided in the table. If the T-bill rate is 5% and the market risk premium is 5.5%. According to the CAPM, what is the expected return of J.R.'s portfolio? $$\begin{array} { | c | c | c | }
\hline \text { Stock } & \text { Investment } & \text { Beta } \
\hline \begin{array} { c }
\text { Motherlode } \
\text { Mines }
\end{array} & \$ 30,000 & 1.6 \
\hline \text { Lewd Lemons } & \$ 40,000 & 1.0 \
\hline \text { Bonanza Beef } & \$ 30,000 & 0.8 \
\hline
\end{array}$$
A)5.50%
B)6.16%
C)10.00%
D)10.50%
E)11.16%

Question

J.R. has a three stock portfolio. Details of the portfolio are provided in the table. If the T-bill rate is 5% and the market risk premium is 5.5%. According to the CAPM, what is the expected return of J.R.'s portfolio? $$\begin{array} { | c | c | c | } 
\hline \text { Stock } & \text { Investment } & \text { Beta } \
\hline \begin{array} { c } 
\text { Motherlode } \
\text { Mines }
\end{array} & \$ 30,000 & 1.6 \
\hline \text { Lewd Lemons } & \$ 40,000 & 1.0 \
\hline \text { Bonanza Beef } & \$ 30,000 & 0.8 \
\hline
\end{array}$$
A)5.50%
B)6.16%
C)10.00%
D)10.50%
E)11.16%

Quizplus · Accepted Answer

The expected return of the portfolio is calculated using the CAPM formula: $ E(R_p) = R_f + \beta_p \times (E(R_m) - R_f) $. First, calculate the portfolio beta: $\beta_p = (30,000/100,000) \times 1.6 + (40,000/100,000) \times 1.0 + (30,000/100,000) \times 0.8 = 1.14$. Then, use the CAPM formula: $ E(R_p) = 5\% + 1.14 \times 5.5\% = 11.27\%$. However, the closest choice is 11.16%.

JR Has a Three Stock Portfolio A)550% B)6

JR Has a Three Stock Portfolio A)550%
B)6