UPS, a delivery services company, has a beta of 1.6, and Wal-Mart has a beta of 0.9. The risk-free rate of interest is 6% and the market risk premium is 9%. What is the expected return on a portfolio with 40% of its money in UPS and the balance in Wal-Mart?

16.62%

Explanation:

First, use CAPM to find the expected return of each stock;

r = risk free + beta (market risk premium)

UPS;

r = 0.06 + (1.6*0.09)

r = 0.204 or 20.4%

Walmart;

r = 0.06 + (0.9*0.09)

r = 0.141 or 14.1%

Next find the return of portfolio;

Let UPS be represented by U and Wal-Mart by W

rP = wU*rU + wW*rW

P = portfolio

w = weight of ...

r = return of ...

rP = (0.40*0.204) + (0.60 * 0.141)

rP = 0.0816 + 0.0846

rP = 0.1662 or 16.62%

Therefore, the expected return on a portfolio is 16.62%