Answer:- Option (e) 8.83%
The required rate of return of Portfolio is 8.83%
Explanation:
First we need to find the risk Premium of existing portfolio using the CAPM model.
Required rate of return = Risk-free rate + (Market Risk premium) x Beta
Required rate of return = RF + ( Rm - RF ) x Beta
9.50% = 4.20% + ( Rm - RF ) x 1.05
9.50% - 4.20% = ( Rm - RF ) x 1.05
5.30% = (Rm - RF) x 1.05
(Rm - RF) = 5.30%/1.05
(Rm - Rf) = 5.05%
Second, we need to find the New Portfolio Beta Using the following step:
Portfolio Beta = ( Existing Portfolio / Total Investment ) x Beta + ( New stock / Total Investment ) x Beta
Portfolio Beta = (10M / 15M) x 1.05 + (5M/15M) x 0.65 = 0.9167
Third Step we will use the CAPM model again to get Required Rate of Return of New Portfolio.
Required rate of return = RF + ( Rm - RF ) x Beta
Required rate of return = 4.20% + (5.05% x 0.9167)
Required Rate of Return = 8.83%
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