Question

In: Finance

Use the following information to answer the next two questions: Stock Amount &nb

Use the following information to answer the next two questions:

Stock Amount Beta

A 25,000 0.2

B 20,000 1.0

C 30,000 1.8

D 25,000 1.6

Risk-free rate is 3% and the market risk premium is 8%

What is the required return for this portfolio?

Expert Solution

Given about a portfolio

Investment in stock A = $25000

Beta of stock A, Ba = 0.2

Investment in stock B = $20000

Beta of stock B, Bb = 1.0

Investment in stock C = $30000

Beta of stock C, Bc = 1.8

Investment in stock D = $25000

Beta of stock D, Bd = 1.6

So, weight of stock A, Wa = investment in A/(investment in A+B+C+D) = 25000/(25000+20000+30000+25000) = 25% or 0.25

Similarly weight of stock B, Wb = investment in B/(investment in A+B+C+D) = 20000/(25000+20000+30000+25000) = 20% or 0.20

Similarly weight of stock C, Wc = investment in C/(investment in A+B+C+D) = 30000/(25000+20000+30000+25000) = 30% or 0.30

Similarly weight of stock D, Wd = investment in D/(investment in A+B+C+D) = 25000/(25000+20000+30000+25000) = 25% or 0.25

So, beta of portfolio is weighted average beta of its assets

=> Beta of portfolio = Wa*Ba + Wb*Ba + Wc*Bc + Wd*Bd = 0.25*0.2+0.2*1+0.3*1.8+0.25*1.6 = 1.19

required return on portfolio is calculated using CAPM

Required return on portfolio = Rf + beta*MRP

Rf = 3%

MRP = 8%

Required return on portfolio = 3 + 1.19*8 = 12.52%

jeff jeffy answered 1 year ago

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