Question

Suppose the risk premium on the market portfolio is estimated at 8% with a standard deviation of 22% You decide to put 25% of your money in Toyota and 75% of your money in Ford Suppose the beta of Toyota = 1.10 Suppose the beta of Ford = 1.25 What is the risk premium of your portfolio?

Answer 1

Answer:

9.7%

Explanation:

For computing the risk premium, first we have to determine the beta portfolio which is shown below:

Portfolio beta = 0.25 × 1.10 + 0.75 × 1.25

                       = 0.275 + 0.9375

                       = 1.2125

Now the risk premium is

= Portfolio beta × risk premium on the market portfolio

= 1.2125 × 8%

= 9.7%

Answer 2

The risk premium of your portfolio is = 9.7%

Computation of Risk premium

Now, For computing the risk premium, firstly we have to determine the beta portfolio which is mentioned below:

The Portfolio beta is = 0.25 × 1.10 + 0.75 × 1.25

Then = 0.275 + 0.9375

After that, = 1.2125

Now the risk premium is

Then = Portfolio beta × risk premium on the market portfolio

After that = 1.2125 × 8%

Therefore, = 9.7%

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