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Your portfolio is diversified. It has an expected return of 11.0% and a beta of 1.10. You want to add 300 shares of Kraft Foods Inc at $40 a share to your portfolio. Kraft Foods Inc has an expected return of 9.0% and a beta of 0.80. The total value of your current portfolio without Kraft is $45,000.
a. Calculate the expected return on the portfolio after the purchase of the Kraft Foods Inc's stock?
b. Calculate the expected beta on the portfolio after you have added Kraft Foods Inc's stock?
c. Is your portfolio less risky or more risky than the market index? Explain.
d. Will your portfolio likely outperform or underperform the market in a period when stocks are rapidly falling in value?
e. A analyst recently commented that betas are always an accurate predictor of a portfolio's performance. Do you agree? Explain.