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9 March, 16:04

The risk-free rate is 5.4 percent and the market risk premium is 5 percent. Assume that required returns are based on the CAPM. Your $1 million portfolio consists of $ 218,000 invested in a stock that has a beta of 0.5 and the remainder invested in a stock that has a beta of 1.4. What is the required return on this portfolio?

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  1. 9 March, 17:44
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    11.419%

    Explanation:

    Given that,

    Risk-free rate = 5.4

    Market risk premium = 5

    Portfolio = $1 million = $1,000,000

    Amount invested in stock A = $218,000

    Beta A = 0.5

    Amount invested in stock B = $1,000,000 - $218,000

    = $782,000

    Remainder invested in stock B that has a beta = 1.4

    Portfolio beta:

    = [ (Amount in A * Beta of A) + (Amount in B * Beta of B) ] : Total Amount

    = [ ($218,000 * 0.5) + ($782,000 * 1.4) ] : $1,000,000

    = ($109,000 + $1,094,800) : $1,000,000

    = 1.2038

    Required return:

    = Risk free rate + (Beta * Market risk premium)

    = 5.4% + (1.2038 * 5%)

    = 5.4% + 6.019%

    = 11.419%

    Therefore, the required return on this portfolio is 11.419%
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