Use the Following Data

question 145

Essay

Use the following data:
Market risk premium = 10%
Risk-free rate = 2%
Beta of XYZ stock = 1.6
Beta of PDQ stock = 2.4
Investment in XYZ stock = $15,000
Investment in PDQ stock = $60,000
You have no assets other than your investments in XYZ and PDQ stock.
What is the expected return of your portfolio? Show all work.

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Definitions:

Equity

Equity represents the value that would be returned to a company’s shareholders if all the assets were liquidated and all the debts repaid.

Current Assets

Assets that are expected to be converted into cash, sold, or consumed within one year or a business's operating cycle, whichever is longer.

Uncollectible Accounts

Accounts receivable that are considered unlikely to be collected and are therefore written off as a loss.

Direct Write-off Method

A method used in accounting to write off bad debts when they are determined to be uncollectible, impacting accounts receivable and expense accounts directly.