Question

# Consider a \$10 million portfolio that consists of the following five stocks: Stock \$Amount Invested Beta...

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%?

 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

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