Question

An individual has $25,000 invested in a stock with a beta of 0.5 and another $65,000 invested in a stock with a beta of 1.2. If these are the only two investments in her portfolio, what is her portfolio's beta? Do not round intermediate calculations. Round your answer to two decimal places.

Assume that the risk-free rate is 3.5% and the required return on the market is 13%. What is the required rate of return on a stock with a beta of 2.4? Round your answer to two decimal places.

Answer 1

1) Portfolio beta is the weighted average of securities beta

Portfolio beta = 0.5*25000/(25000+65000) + 1.2*65000/(25000+65000)

=0.5*25/90 + 1.2*65/90

=0.14 + 0.87

=1

2) As per CAPM

required return = risk free rate + beta*(market return - risk free rate)

= 3.5 + 2.4*(13 - 3.5)

=3.5 + 2.4*9.5

=26.3%