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17 April, 19:39

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?

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  1. 17 April, 19:41
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    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%
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