Question

What is the required return of the following well-diversified portfolio if the risk-free rate is 2% and the return on the market is 9%?

Stock | Amount | Beta | Expected Return |

A | $100,000 | 1.2 | 10 |

B | $200,000 | 0.8 | 8 |

C | $100,000 | 1.4 | 12 |

Answer #1

**The required return is computed as shown
below:**

**= risk free rate + beta x ( return on market - risk free
rate)**

**beta is computed as shown below:**

**= Beta of stock A x weight of stock A + Beta
of stock B x weight of stock B + Beta of stock C x
weight of stock C**

= 1.2 x $ 100,000 / $ 400,000 + 0.8 x $ 200,000 / $ 400,000 + 1.4 x $ 100,000 / $ 400,000

**= 1.05**

**So, the return will be computed as follows:**

= 0.02 + 1.05 (0.09 - 0.02)

**= 9.35%**

Feel free to ask in case of any query relating to this question

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