In: Finance
Quantitative Problem: You are holding a portfolio with the following investments and betas:
Stock | Dollar investment | Beta | ||
A | $200,000 | 1.15 | ||
B | 100,000 | 1.60 | ||
C | 500,000 | 0.80 | ||
D | 200,000 | -0.30 | ||
Total investment | $1,000,000 |
The market's required return is 9% and the risk-free rate is 3%. What is the portfolio's required return? Do not round intermediate calculations. Round your answer to three decimal places.
Ans 7.38%
Stock | INVESTMENT (i) | Beta (ii) | Investment* Beta (i)* (ii) |
A | 2,00,000 | 1.15 | 2,30,000.00 |
B | 1,00,000 | 1.60 | 1,60,000.00 |
C | 5,00,000 | 0.80 | 4,00,000.00 |
D | 2,00,000 | (0.30) | (60,000.00) |
Total | 10,00,000 | 7,30,000 | |
AVERAGE BETA = | (INVESTMENT * BETA) / TOTAL INVESMENT | ||
730000 / 1000000 | |||
0.730000000000 | |||
Required Return = | Risk free Return + (Market Return - Risk free return)* Beta | ||
Required Return = | 3% + (9% - 3%)*0.730 | ||
Required Return = | 7.38% |