7-14 (40 marks) Expected Returns and Security Market Line

Meera has the following portfolio:

Stock	Amount Invested	Beta	Expected Return
Bio-Eng. Inc.	$ 75,000	1.90	12.50%
Canada Pipelines Co.	125,000	0.75	6.75
Industrial Auto Parts	200,000	1.20	9.00

Upon further analysis, she determines that the current risk-free rate is 3%, while the market risk premium is 5%.

a. What return does Meera expect on her portfolio, based on the individual stocks expected returns?

b. What is the required return on the portfolio? What do the answers in parts a and b tell you about the stocks?

c. Meera is thinking of adding another stock, Offshore Oil 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.

d. Assuming that Offshore Oil does provide the expected return required and that Meera invests another $100,000 in Offshore Oil, what will be her portfolios new expected return?

No excel please