Question

An investor is forming a portfolio by investing $86,534 in stock A that has a beta...

An investor is forming a portfolio by investing $86,534 in stock A that has a beta
of 2, and $23,817 in stock B that has a beta of 0.4. The market risk
premium is equal to 2.8% and Treasury bonds have a yield of 2.5%. What is the
required rate of return on the investor’s portfolio?
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Homework Answers

Answer #1

As per CAPM

Expected return = risk free rate+market risk premium*beta

Beta of portfolio =(beta of stock A*investment in stock A/Total investment)+beta of stock B*investment in stock B/total investment)

Total investment =$86534+$23817=$110,351

Beta of portfolio= 2* (86534/110351)+(23817/110351)*0.4

Beta of portfolio = 0.7842*2 + 0.2158*0.4

Beta of portfolio =1.5684+0.0863

Beta of portfolio =1.6547

Return on portfolio = 2.5% +(2.8*1.6547)

Return on portfolio = 2.5%+4.6332

Return on portfolio = 7.13%

If you have any doubt,please ask

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