Answer:
The required rate of return on new portfolio is 8.83%. So, option a is the correct answer.
Explanation:
To use the CAPM approach to calculate the new required rate of return, we first need to determine the beta for the new portfolio.
Portfolio beta is the weighted average of the individual stock betas that form up the portfolio. The weightage is assigned based on the investment in the stocks as a proportion of the total investment.
Total investment in new portfolio = 10 + 5 = 15 million
New portfolio beta = 10/15 * 1.05 + 5/15 * 0.65
New portfolio beta = 0.9167
We need to calculate the market risk premium, using the old required rate of return, to use in CAPM.
r = rRF + Beta * rpM
0.095 = 0.042 + 1.05 * rpM
0.095 -0.042 = 1.05rpM
(0.053) / 1.05 = rpM
rpM = 0.05047 or 5.047% rounded off to 5.05%
The new required rate of return using CAPM,
r = 0.042 + 0.9167 * 0.0505
r = 0.08829 or 8.829% rounded off to 8.83%
