Question

ou are holding a portfolio with the following investments and betas: Stock Dollar investment Beta A $300,000 1.3 B 200,000 1.5 C 300,000 0.65 D 200,000 -0.2 Total investment $1,000,000 The market's required return is 9% and the risk-free rate is 4%. What is the portfolio's required return? Do not round intermediate calculations. Round your answer to three decimal places.

Answer 1

Total Dollar investment in a portfolio = $300,000 + $200,000 + $300,000 + $200,000 = $1,000,000

Beta of the portfolio = [(300,000/1,000,000) * 1.30] + [(200,000/1,000,000) * 1.50] + [(300,000/1,000,000) * 0.65] + [(200,000/1,000,000) * -0.2]

Beta of the portfolio = 0.845

Portfolio's required return = risk free rate + [Portfolio's beta * (Market required return - Risk Free rate)]

Portfolio's required return = 4% + [0.845 * (9% - 4%)]

Portfolio's required return = 4% + 4.225%

Portfolio's required return = 8.225%.