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What is the required return of the following well-diversified portfolio if the risk-free rate is 2%...

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
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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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