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Quantitative Problem: You are holding a portfolio with the following investments and betas: Stock Dollar investment...

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.

Solutions

Expert Solution

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%

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