UPS, a delivery services company, has a beta of , and Wal-Mart has a beta of The risk-free rate of interest is and the market risk premium is %. What is the expected return on a portfolio with 40% of its money in UPS and the balance in Wal-Mart?

The question is incomplete as it does not contain values. The following is the complete question.

UPS, a delivery services company, has a beta of 1.2, and Wal-mart has a beta of 0.8. The risk-free rate of interest is 4% and the market risk premium is 7%. What is the expected return a portfolio with 40% of its money in UPS and the balance in Wal-Mart?

The expected return of the portfolio is Portfolio r = 0.1072 or 10.72%

Explanation:

The expected return of a portfolio is the weighted average of the individual stocks' expected returns that form up the portfolio.

The formula for portfolio's expected return is as follows,

Portfolio r = wA * rA + wB * rB + ... + wN * rN

Where,

To calculate the expected return of the portfolio, we will first calculate the expected return of UPS and Wal Mart using the CAPM equation.

The formula for expected return under CAPM is,

r = rRF + Beta * rpM

Where,

r UPS = 0.04 + 1.2 * 0.07

r UPS = 0.124 or 12.4%

r Wal Mart = 0.04 + 0.8 * 0.07

r Wal Mart = 0.096 or 9.6%

Portfolio r = 0.4 * 0.124  +  0.6 * 0.096

Portfolio r = 0.1072 or 10.72%

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