Question

Quantitative Problem: You are holding a portfolio with the following investments and betas: Stock Dollar investment...

Quantitative Problem: You are holding a portfolio with the following investments and betas:

Stock Dollar investment Beta
A $300,000 1.35
B 150,000 1.5
C 500,000 0.75
D 50,000 -0.25
Total investment 1,000,000


The market's required return is 10% and the risk-free rate is 5%. What is the portfolio's required return? Round your answer to 3 decimal places. Do not round intermediate calculations.
%

Homework Answers

Answer #1
Stock Dollar investment Beta Weight Weighted Beta
A 300000 1.35 0.3 0.405
B 150000 1.5 0.15 0.225
C 50000 0.75 0.05 0.0375
D 50000 -0.25 0.05 -0.0125
Total investment 1000000 Portfolio Beta =sum = 0.655

where weight = dollar investment/total investment

weighted beta = beta*weight

As per CAPM
expected return = risk-free rate + beta * (expected return on the market - risk-free rate)
Expected return% = 5 + 0.655 * (10 - 5)
Expected return% = 8.275
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