Johnny's portfolio consists of $100,000 invested in a stock which has a beta = 0.9, $150,000...

Johnny's portfolio consists of $100,000 invested in a stock which has a beta = 0.9, $150,000 invested in a stock which has a beta = 1.2, and $50,000 invested in a stock which has a beta = 1.5. The risk-free rate is 4 percent. Last year this portfolio had a required rate of return of 13 percent. This year nothing has changed except for the fact that the market risk premium has decreased by 2 percent (This year market risk premium = Last year market risk premium - 2%). and risk free remains constant. What is the portfolio's current year required rate of return?

Solutions

Expert Solution

Investment in Stock 1 = $100,000
Investment in Stock 2 = $150,000
Investment in Stock 3 = $50,000

Total Investment = Investment in Stock 1 + Investment in Stock 2 + Investment in Stock 3
Total Investment = $100,000 + $150,000 + $50,000
Total Investment = $300,000

Weight of Stock 1 = Investment in Stock 1 / Total Investment
Weight of Stock 1 = $100,000 / $300,000
Weight of Stock 1 = 0.33333

Weight of Stock 2 = Investment in Stock 1 / Total Investment
Weight of Stock 2 = $150,000 / $300,000
Weight of Stock 2 = 0.50000

Weight of Stock 3 = Investment in Stock 1 / Total Investment
Weight of Stock 3 = $50,000 / $300,000
Weight of Stock 3 = 0.16667

Portfolio Beta = Weight of Stock 1 * Beta of Stock 1 + Weight of Stock 2 * Beta of Stock 2 + Weight of Stock 3 * Beta of Stock 3
Portfolio Beta = 0.33333 * 0.90 + 0.50000 * 1.20 + 0.16667 * 1.50
Portfolio Beta = 1.15

Change in Market Risk Premium = -2.00%

New Portfolio Required Return = Old Portfolio Required Return + Change in Market Risk Premium * Portfolio Beta
New Portfolio Required Return = 13.00% - 2.00% * 1.15
New Portfolio Required Return = 13.00% - 2.30%
New Portfolio Required Return = 10.70%

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.5 and...

Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.5 and $300,000 invested in a stock that has a beta of 0.8. The risk-free rate is 6% and the market risk premium is 5%. Which of the following statements is CORRECT? Answers: a. The portfolio's required return is less than 11%. b. If the risk-free rate remains unchanged but the market risk premium increases by 2%, Gretta's portfolio's required return will increase by more than...

An investor is forming a portfolio by investing $150,000 in stock A which has a beta...

An investor is forming a portfolio by investing $150,000 in stock A which has a beta of 2.40, and $150,000 in stock B which has a beta of 0.60. The market risk premium is equal to 5% and treasure bonds have a yield of 3% (rRF). What’s the portfolio beta? 1.60 1.95 1.50 1.80 Using the information in Question, calculate the required rate of return on the investor’s portfolio 8.5% 10.5% 12.75% 9.5%

PORTFOLIO BETA An individual has $45,000 invested in a stock with a beta of 0.8 and...

PORTFOLIO BETA An individual has $45,000 invested in a stock with a beta of 0.8 and another $30,000 invested in a stock with a beta of 2.5. If these are the only two investments in her portfolio, what is her portfolio's beta? Round your answer to two decimal places.

A portfolio manager has a $10 million portfolio, which consists of $1 million invested in stock...

A portfolio manager has a $10 million portfolio, which consists of $1 million invested in stock X and $2million invested in stock Y seperate stocks. Stock X has a beta of 0.9 where as stock Y has a beta of 1.3. The risk-free rate is 5% and the market risk premium is 6%. a. Calculate portfolio's beta b. Calculate stock X and stock Y required returns. c. Calculate portfolio's required return. d. Calculate portfolio's required rate of return if risk...

Donald Gilmore has $100,000 invested in a 2-stock portfolio. $20,000 is invested in Stock X and...

Donald Gilmore has $100,000 invested in a 2-stock portfolio. $20,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta? Zacher Co.'s stock has a beta of 1.12, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return? Porter Plumbing's stock had a required return of 14.25% last year, when the risk-free rate...

A portfolio consists of 50% invested in Stock X and 50% invested in Stock Y. We...

A portfolio consists of 50% invested in Stock X and 50% invested in Stock Y. We expect two probable states to occur in the future: boom or normal. The probability of each state and the return of each stock in each state are presented in the table below. State Probability of state Return on Stock X Return on Stock Y Boom 20% 25% 35% Normal 80% 10% 5% What are the expected portfolio return and standard deviation? Select one: a....

Currently, your portfolio consists of $3,000 invested in share A with a beta of 0.7 and...

Currently, your portfolio consists of $3,000 invested in share A with a beta of 0.7 and $4,000 in share B with a beta of 0.5. You have another $12,000 to invest and want to divide it between share C with a beta of 1.3 and a risk-free asset. You want your portfolio beta to be 0.9. How much (to the nearest dollar) should you invest in the risk free asset? a. 2,000 b. 10,000 c. $3,000 d.8,800

Problem 12-10 Portfolio Weights (LO4, CFA2) A stock has a beta of 0.9 and an expected...

Problem 12-10 Portfolio Weights (LO4, CFA2) A stock has a beta of 0.9 and an expected return of 13 percent. A risk-free asset currently earns 4.4 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. If a portfolio of the two assets has a beta of 0.78, what are the portfolio weights? (Do not...

what is the beta of a three-stock portfolio including $2500 invested in stock A with a...

what is the beta of a three-stock portfolio including $2500 invested in stock A with a beta of .90, $4000 invested in stock B with a beta of 1.05, and $3500 invested in stock C with beta of 1.73?

A portfolio consists of $15,000 in Stock M and $22,900 invested in Stock N. The expected...

A portfolio consists of $15,000 in Stock M and $22,900 invested in Stock N. The expected return on these stocks is 8.80 percent and 12.40 percent, respectively. What is the expected return on the portfolio? 11.69% 10.22% 10.98% 10.60% 9.37% You decide to invest in a portfolio consisting of 30 percent Stock A, 30 percent Stock B, and the remainder in Stock C. Based on the following information, what is the expected return of your portfolio? State of Economy Probability...

Subjects