Question

You have been managing a $5 million portfolio that has a beta of 1.75 and a required rate of return of 11%. The current risk-free rate is 6.50%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 1.75, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places.

Answer #1

Calculation of market return: | ||||

Required return= risk free rate+beta*(market return- risk free rate) | ||||

11= 6.50+ 1.75*(market return-6.50) | ||||

Market return= 9.07% | ||||

Calculation of beta of portfolio | ||||

Stock | Value | Weights(a) | Beta(b) | (a*b) |

A | 5000000 | 0.91 | 1.75 | 1.59 |

B | 500000 | 0.09 | 1.75 | 0.16 |

5500000 | 1 | 1.75 | ||

Beta is 1.75 | ||||

Calculation of required return: | ||||

Required return= risk free rate+beta*(market return- risk free rate) | ||||

Required return= 6.50+1.75*(9.07-6.5) | ||||

Required return= 11% |

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