Question

Consider a $10 million portfolio that consists of the following five stocks:

Stock	$Amount Invested	Beta
A	4 million	1.7
B	2 million	1.1
C	2 million	1.0
D	1 million	0.7
E	1 million	0.5

What is the required return on this portfolio if the risk free rate of return is 5.9% and the market risk premium is 5%?

Answer 1

Total Portfolio value = Value of A + Value of B + Value of C + Value of D + Value of E

=4+2+2+1+1

=10

Weight of A = Value of A/Total Portfolio Value

= 4/10

=0.4

Weight of B = Value of B/Total Portfolio Value

= 2/10

=0.2

Weight of C = Value of C/Total Portfolio Value

= 2/10

=0.2

Weight of D = Value of D/Total Portfolio Value

= 1/10

=0.1

Weight of E = Value of E/Total Portfolio Value

= 1/10

=0.1

Beta of Portfolio = Weight of A*Beta of A+Weight of B*Beta of B+Weight of C*Beta of C+Weight of D*Beta of D+Weight of E*Beta of E

Beta of Portfolio = 1.7*0.4+1.1*0.2+1*0.2+0.7*0.1+0.5*0.1

Beta of Portfolio = 1.22

As per CAPM

expected return = risk-free rate + beta * (Market risk premium)

Expected return% = 5.9 + 1.22 * (5)

Expected return% = 12