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%