Question

The risk-free rate is 2% and the return on the market is 12%, what is the required rate of return on the following portfolio? Stock Amount Invested Beta A $6,000 0.6 B $9,000 1.8 C $5,000 1.2 15.71% 11.48% 13.16% 12.52% 14.90%

Answer 1

Calculation of the Beta of the Portfolio which is weighted average beta of individual asset's beta

Stock	Amount Invested	Beta	Weight	Beta * Weight
A	6000	0.6	30%	0.18
B	9000	1.8	45%	0.81
C	5000	1.2	25%	0.30
	20000			1.29

Beta of portfolio =1.29

As per CAPM,

Expected Return = Risk free Rate + Beta * (Market Return -Riskfree Rate)

Expected Return = 2% + (1.29)*(12%-2%)

Expected Return =2% + 1.29*10%

Expected Return =14.90%

The correct answer is option E i.e. 14.90%

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