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 1 year ago

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