The risk-free rate, kRF, is 6.4 percent and the market risk premium, (kM - kRF), is...

The risk-free rate, kRF, is 6.4 percent and the market risk premium, (kM - kRF), is 5 percent. Assume that required returns are based on the CAPM. Your $1 million portfolio consists of $ 268 ,000 invested in a stock that has a beta of 1.0 and the remainder invested in a stock that has a beta of 0.9 . What is the required return on this portfolio? Enter your answer to the nearest .1%. Do not use the % sign in your answer, thus 12.1% is 12. 1 rather than 12.1 or .121.

Expert Solution

Portfolio Beta is weighted Avg beta of securities in that portfolio.

Security	Amount	Weights	Beta	Wtd Beta
A	$ 2,68,000.00	0.2680	1.00	0.2680
B	$ 7,32,000.00	0.7320	0.90	0.6588
Portfolio Beta				0.9268

Portfolio Required Ret :

Beta Specifies Systematic Risk
Systematic risk specifies the How many times security return will deviate to market changes.
SML return considers the risk premium for Systematic risk alone.Where as CML return considers risk premium for Total risk.
Beta of market is "1".

Particulars	Amount
Risk Free Rate	6.4%
Market Return	11.4%
Beta	0.9268
Risk Premium ( Rm - Rf)	5.00%

Required Return = Rf + Beta ( Rm - Rf )
= 6.4 % + 0.9268 ( 5 % )
= 6.4 % + ( 4.63 % )
= 11.03 %

Answer is 11.03.

Pls comment, if any further assistance is required.

jeff jeffy answered 1 year ago

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