Answer:
(C) 11.11%
Explanation:
In this question, we use the Capital Asset Pricing Model formula which is shown below:
Expected rate of return = Risk-free rate + Beta × (Required rate of return - risk-free rate)
The beta is not given so first we have to compute it. The calculation is shown below:
Stock A = (Stock amount ÷ total amount) × Beta
= ( $1,075,000 ÷ $3,000,000) × 1.20
= 0.3583 × 1.20
= 0.43
Stock B = (Stock amount ÷ total amount) × Beta
= ($675,000 ÷ $3,000,000) × 0.50
= 0.225 × 0.50
= 0.1125
Stock C = (Stock amount ÷ total amount) × Beta
= ( $750,000 ÷ $3,000,000) × 1.40
= 0.25 × 1.40
= 0.35
Stock D = (Stock amount ÷ total amount) × Beta
= ( $500,000 ÷ $3,000,000) × 0.75
= 0.1667 × 0.75
= 0.1251
The total value of beta equals to
= 0.43 + 0.1125 + 0.35 + 0.1251
= 1.017
Now put these values to the above formula
So, the value would equal to
= 5% + 1.017 × (11% - 5%)
= 5% + 6.102%
= 11.102%
