Karen has the following portfolio:
|
Stock
|
Amount Invested
|
Beta
|
Expected Return
|
|
Bio-Eng Inc.
|
$75,000
|
1.9
|
12.5%
|
|
Canada Pipelines Co.
|
$125,000
|
0.75
|
6.75
|
|
Industrial Auto Parts
|
$200,000
|
1.2
|
9
|
Upon further analysis, she determines that the current risk-free rate is 3%, while the market risk premium is 5%.
What return does Karen expect on her portfolio, based on the individual stocks' expected returns?
What is the required return on the portfolio? What do the answers in part (a) and part (b) tell you about the stocks?
Karen is thinking of adding another stock, Offshore Oli Co., to her portfolio. Offshore has a beta of 2.3 and an expected return of 14%. Should she add this stock? Briefly explain why or why not.
Assuming that Offshore Oil does provide the expected return required and that Karen invests another $100,000 in Offshore Oil, what will be her portfolio's new expected return?