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The Adams portfolio contains 35% Khallin Equipment stock and 65% Giant Semiconductor stock. Analyst Joe Karroll estimates that 40% of Khallin’s return variance is determined by cost trends and 60% is determined by purchasing trends.
ReturnKhallin = E(RKhallin) + (0.4 × Cost Factor) + (0.6 × Purchasing Factor)
Karroll also estimates that Giant’s return variance is 75% determined by cost trends and 25 percent determined by purchasing trends.
ReturnGiant = E(RGiant) + (0.75 × Cost Factor) + (0.25 × Purchasing Factor)
With an estimated return of 7% for Khallin and 16% for Giant, and given a cost factor of –0.07 and a purchasing factor of 0.0325, the Adams portfolio’s expected return is closest to: A. 9.7%. B. 12.9%. C. 11.3%. |