Question

Your investment club has only two stocks in its portfolio. $50,000 is invested in a stock with a beta of 0.8, and $30,000 is invested in a stock with a beta of 2.0. What is the portfolio's beta?

AA Corporation's stock has a beta of 1.1. The risk-free rate is 4%, and the expected return on the market is 13%. What is the required rate of return on AA's stock? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Answer to Question 1:
Amount invested in Stock 1 = $50,000
Amount invested in Stock 2 = $30,000
Total Amount invested = $50,000 + $30,000 = $80,000

Weight of Stock 1 = $50,000 / $80,000
Weight of Stock 1 = 0.625

Weight of Stock 2 = $30,000 / $80,000
Weight of Stock 2 = 0.375

Portfolio Beta = (Weight of Stock 1 * Beta of Stock 1) + (Weight of Stock 2 * Beta of Stock 2)
Portfolio Beta = (0.625 * 0.8) + (0.375 * 2.0)
Portfolio Beta = 0.50 + 0.75
Portfolio Beta = 1.25

Answer to Question 2:
Required Return = Risk Free Rate + Beta * (Market Return – Risk Free Rate)
Required Return = 4.00% + 1.10 * (13.00% - 4.00%)
Required Return = 4.00% + 9.90%
Required Return = 13.90%