Question

Jonathan Crowley is a portfolio manager for a large pension fund. Last year his portfolio had an actual return of 12.6% with a standard deviation of 13% and a beta of 1.3. The market risk premium for this period of time was 6% and the risk-free rate of return was 5%.82.
Based on the Capital Asset Pricing Model (CAPM), what is the required rate of return for this portfolio?

Answer 1

Answer:

The required rate of return of the portfolio is 13.62%

Explanation:

The required rate of return is the minimum return that investors require to invest in a stock or portfolio. The required rate of return can be calculated using the CAPM formula for required rate of return. The formula is,

r = rRF + Beta * rpM

Where,

• rRF is the risk free rate
• beta is the stock/portfolio's beta or measure of risk
• rpM is the risk premium on market

r = 5.82% + 1.3 * 6%

r = 0.1362 or 13.62%