Question 4

You have allocated 70% of your portfolio to stock X and 30% to stock Y. Stock X has a beta of 1.6 and an actual expected return of 12%. Stock Y has a beta of 1.2 and its actual expected return is 9%.

1. Compute the beta of your portfolio?
2. Compute the actual expected return of your portfolio?

Suppose the market is expected to generate a return of 7% and the risk-free rate is 2%.

1. What is the fair return on your portfolio?
2. What is the alpha of your portfolio?