A portfolio consists of four assets in equal weights. Asset 1 has a beta of 0.95....

A portfolio consists of four assets in equal weights. Asset 1 has a beta of 0.95. Asset 2 has a beta of 1.00. Asset 3 has a beta of 1.45. Asset 4 has a beta of 1.15. If the portfolio's required return is 7.75% and the risk-free rate is 3.70%, what is Asset 2's required return?

Expert Solution

Asset 2's required return is 7.25%

Step-1:Calculation of weighted beta of portfolio


	Weight	Beta
	a	b	c=a*b
Asset 1	0.25	0.95	0.24
Asset 2	0.25	1.00	0.25
Asset 3	0.25	1.45	0.36
Asset 4	0.25	1.15	0.29

Portfolio Beta		1.14

Step-2:Calculation of market risk premium

Portfolio required return	=	Risk free rate + Beta * Market Risk Premium
0.0775	=	0.037+1.14*Market Risk Premium
0.0405	=	1.14*Market Risk Premium
Market Risk Premium	=	3.55%

Step-3:Calculation of Asset 2's required return

Required return	=	Risk free rate	+	Beta	*	Market Risk Premium
	=	3.70%	+	1.00	*	3.55%
	=	7.25%

jeff jeffy answered 2 years ago

a.)A portfolio consists of four assets in equal weights. Asset 1 has a beta of 0.90....

a.)A portfolio consists of four assets in equal weights. Asset 1 has a beta of 0.90. Asset 2 has a beta of 1.00. Asset 3 has a beta of 1.40. Asset 4 has a beta of 1.10. If the portfolio's required return is 7.50% and the risk-free rate is 3.60%, what is Asset 2's required return? b.) Suppose the risk-free rate is 5.90% and the market portfolio has an expected return of 15.75%. A portfolio is invested equally in three...

(b) If a portfolio has a beta equal to 1, it is an efficient portfolio and...

(b) If a portfolio has a beta equal to 1, it is an efficient portfolio and it sits on the CML. Is this statement true or false? Explain. (c) In practice, it is estimated that most unsystematic risk can be diversified away in a portfolio of 20 to 30 assets. Is this statement true or false? Explain. (d) Define idiosyncratic risk and systematic risk. Discuss their relationship with risk premium and beta.

You have been managing a $5 million portfolio that has a beta of 0.95 and a...

You have been managing a $5 million portfolio that has a beta of 0.95 and a required rate of return of 5.325%. The current risk-free rate is 2%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 1.15, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places.

A portfolio consists of the following four stocks. The dollar investment and beta on each of...

A portfolio consists of the following four stocks. The dollar investment and beta on each of the stocks are listed below: Stock Investment Beta A $200,000 0.5 B $800,000 0.8 C $1,500,000 1.5 D $2,500,000 -0.25 If the expected return on the market is 11% and the risk-free rate is 4%, what is the portfolio’s required rate of return?

1) The beta of a financial asset is equal to __________. A. the covariance between the...

1) The beta of a financial asset is equal to __________. A. the covariance between the security and market returns divided by the variance of the market's returns B. one, if the standard deviation of returns matches the market standard deviation C. both (A) and (B) are true D. none of the above 2) According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is ________________. A. directly related to the risk aversion...

QUESTION3 Marks Consider two assets having equal weights in the portfolio (W1 = 0.50; W2 =...

QUESTION3 Marks Consider two assets having equal weights in the portfolio (W1 = 0.50; W2 = 0.50) and each asset has a standard deviation of 0.10. Using the above information, calculate: (a) the covariance of the portfolio for each of the five cases below. (b) the standard deviation of the portfolio for each of the five cases below. (c) Which of these cases guarantees an investor a complete risk-free portfolio? a. r1,2 = 1.00 b. r1,2 = 0.50 c. r1,2...

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...

Your portfolio has a beta of 1.25. The portfolio consists of 17 percent U.S. Treasury bills,...

Your portfolio has a beta of 1.25. The portfolio consists of 17 percent U.S. Treasury bills, 29 percent in stock A, and 54 percent in stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of stock B? How can I use Excel to Find Beta?

1/ You invest in a portfolio that has 2 assets: T-bills and a risky asset that...

1/ You invest in a portfolio that has 2 assets: T-bills and a risky asset that has a beta of 1.6. If you want a portfolio with a beta of 1.2, how much should you invest in each asset? 2/ An analyst at MGK Inc tells you that if you invest in CitrusJuice shares today, you will receive of a return of 11%. Should you invest in the share based on this advice? Why or why not? Beta of the...

1. You have a stock portfolio that consists of the following positions (price and beta as...

1. You have a stock portfolio that consists of the following positions (price and beta as of 12:34 PM on 10/21/2019): Shares Price Beta Amazon 25 1782.52 1.63 Apple 90 240.38 1.10 Tesla 85 253.26 0.32 Costco 75 301.62 0.93 Disney 50 130.32 0.72 (a) What is the portfolio beta? [Hint: You will need to compute the weights for each stock.] (b) If the market return is expected to be 2.5% and the risk-free rate is 1%, then what is...

Question