Question

You have been managing a $5 million portfolio that has a beta of 1.45 and a required rate of return of 9.975%. The current risk-free rate is 2%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 1.25, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Answer:

8.934%

Explanation:

r(m) = r(f) + [b × r(p)]

r(m) = expected return = 9.975%

r(f) = risk free rate = 2%

b = beta = 1.45

r(p) = risk premium

so,r(p) = (9.975 - 2) ÷ 1.45

           = 5.5%

for portfolio,

r(m) = r(f) + (b1 × w1 + b2 × w2) × r(p)

b1 = 1.45, w1 = (5 ÷ 5.5), b2 = 1.25, w2 = (0.5 ÷ 5.5)

r(m) = 2 + [1.45 × (5/5.5) + 1.25 × (0.5/5.5)] + 5.5

      = 2 + 1.32 + 0.114 + 5.5

      = 8.934%