You have been managing a $5 million portfolio that has a beta of 1.45 and a required rate of return of 9.975%. The current risk-free rate is 2%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 1.25, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places.

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Business

Kale Briggs

11 June, 12:05

You have been managing a $5 million portfolio that has a beta of 1.45 and a required rate of return of 9.975%. The current risk-free rate is 2%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 1.25, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places.

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Catalina Brandt · Answer 1

8.934%

Explanation:

r (m) = r (f) + [b * r (p) ]

r (m) = expected return = 9.975%

r (f) = risk free rate = 2%

b = beta = 1.45

r (p) = risk premium

so, r (p) = (9.975 - 2) : 1.45

= 5.5%

for portfolio,

r (m) = r (f) + (b1 * w1 + b2 * w2) * r (p)

b1 = 1.45, w1 = (5 : 5.5), b2 = 1.25, w2 = (0.5 : 5.5)

r (m) = 2 + [1.45 * (5/5.5) + 1.25 * (0.5/5.5) ] + 5.5

= 2 + 1.32 + 0.114 + 5.5

= 8.934%