1. Tom has $300,000 to invest. He invests his money into four stocks with the following...

1. Tom has $300,000 to invest. He invests his money into four stocks with the following betas:

Stock A= $120,000 Beta: 2.15

Stock B= $75,000 Beta: 0.40

Stock C= $50,000 Beta: 0.85

Stock D= $55,000 Beta: 0.66

The risk-free rate is 4%, and the expected market return is 9% Compute the required rate of return on the portfolio.

Expert Solution

Ans 10.11%

Stock	INVESTMENT (i)	Beta (ii)	Investment* Beta (i)* (ii)
A	1,20,000	2.15	2,58,000.00
B	75,000	0.40	30,000.00
C	50,000	0.85	42,500.00
D	55,000	0.66	36,300.00
Total	3,00,000		3,66,800.00


AVERAGE BETA =	(INVESTMENT * BETA) / TOTAL INVESMENT
	366800 / 300000
	1.222666667

Expected Return =	Risk free Return + (Market Return - Risk free return)* Beta
Expected Return =	4% + (9% - 4%) *1.222666667
Expected Return =	10.11%

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