Question

Calculate the portfolio required rate of return (rs) for the Wagner Assets Management Group, which holds 4 stocks. The expected market return is 13.0%, the risk-free rate is 5.0%, and the Fund's assets are show below. Hint: You must first calculate the stock weights and portfolio beta. Stock Investment Beta A $ 200,000 1.50 B 300,000 -0.50 C 500,000 1.25 D 1,000,000 0.75 a. 12.30% b. 10.00% c. 9.00% d. 13.10% e. 11.10%

Answer 1

Answer:

11.10%

Explanation:

For computing the portfolio required rate of return first we have to calculate the portfolio beta which is shown below:

Portfolio Beta = Beta of Stock A × Weight of Stock A + Beta of Stock B × Weight of Stock B + Beta of Stock C × Weight of Stock C + Beta of Stock D × Weight of Stock D

= 1.50 × $200,000 ÷ ($200,000 + $300,000 + $500,000 + $1,000,000) 0-.50 × $300,000 ÷ ($200,000 + $300,000 + $500,000 + $1,000,000) + 1.25 × $500,000 ÷ ($200,000 + $300,000 + $500,000 + $1,000,000) + 0.75 × $1,000,000 ÷ ($200,000 + $300,000 + $500,000 + $1,000,000)

= .7625

Now the portfolio Required Rate of Return  is

Required Rate of Return = Risk Free Rate + Beta × (Market Rate of Return - Risk Free Rate)

= 5% + .7625 × (13% - 5%)

= 11.10%

We simply applied the above formulas