The risk-free rate is 5.4 percent and the market risk premium is 5 percent. Assume that required returns are based on the CAPM. Your $1 million portfolio consists of $ 218,000 invested in a stock that has a beta of 0.5 and the remainder invested in a stock that has a beta of 1.4. What is the required return on this portfolio?

11.419%

Explanation:

Given that,

Risk-free rate = 5.4

Market risk premium = 5

Portfolio = $1 million = $1,000,000

Amount invested in stock A = $218,000

Beta A = 0.5

Amount invested in stock B = $1,000,000 - $218,000

= $782,000

Remainder invested in stock B that has a beta = 1.4

Portfolio beta:

= [ (Amount in A * Beta of A) + (Amount in B * Beta of B) ] : Total Amount

= [ ($218,000 * 0.5) + ($782,000 * 1.4) ] : $1,000,000

= ($109,000 + $1,094,800) : $1,000,000

= 1.2038

Required return:

= Risk free rate + (Beta * Market risk premium)

= 5.4% + (1.2038 * 5%)

= 5.4% + 6.019%

= 11.419%

Therefore, the required return on this portfolio is 11.419%