Risk Premiums You own $14,000 of Diner's Corp.stock that has a beta of 2.1.You also own $14,000 of Comm Corp.(beta = 1.3)and $12,000 of Airlines Corp.(beta = 0.6).Assume that the market return will be 15 percent and the risk-free rate is 6.5 percent.What is the total risk premium of the portfolio?
A)11.645 percent
B)20.55 percent
C)23.905 percent
D)38.00 percent

Question

Quizplus · Accepted Answer

The total risk premium of the portfolio is calculated using the weighted average beta of the portfolio and the market risk premium. The portfolio beta is (14000/40000)*2.1 + (14000/40000)*1.3 + (12000/40000)*0.6 = 1.35. The market risk premium is 15% - 6.5% = 8.5%. Therefore, the total risk premium is 1.35 * 8.5% = 11.475%.

Risk Premiums You Own $14,000 of Diner's Corp