Matthew decides to invest $1,200,000 into the following five stocks: Stock 1= $500,000 β= 1.22 Stock...

Matthew decides to invest $1,200,000 into the following five stocks:

Stock 1= $500,000 β= 1.22

Stock 2= $300,000 β= 0.21

Stock 3= $140,000 β= 0.92

Stock 4= $160,000 β= -0.36

Stock 5= $100,000 β= 2.35

Risk free rate: 2.50%

Expected market return is 7%.

What is the required rate of return for the above?

Please show equations/formulas used in excel to explain how you got the answer. Thanks!

Expert Solution

Ans 6.17%

Stock	INVESTMENT (i)	Beta (ii)	Investment* Beta (i)* (ii)
1	5,00,000	1.22	6,10,000.00
2	3,00,000	0.21	63,000.00
3	1,40,000	0.92	1,28,800.00
4	1,60,000	(0.36)	(57,600.00)
5	1,00,000	2.35	2,35,000.00
Total	12,00,000		9,79,200


AVERAGE BETA =	(INVESTMENT * BETA) / TOTAL INVESMENT
	979200 / 1200000
	0.816

Required Return =	Risk free Return + (Market Return - Risk free return)* Beta
Required Return =	2.50% + (7% - 2.50%)*0.816
Required Return =	6.17%

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