Question

Given the following information, determine the beta coefficient for Stock L that is consistent with equilibrium:  = 12.5%; r_RF = 5.5%; r_M = 8.5%. Round your answer to two decimal places.

You have been managing a $5 million portfolio that has a beta of 1.05 and a required rate of return of 10.775%. The current risk-free rate is 5%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 1.25, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places.

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Answer 1

Given the following information, determine the beta coefficient for Stock L that is consistent with equilibrium:  = 12.5%; r_RF = 5.5%; r_M = 8.5%. Round your answer to two decimal places.

using CAPM model, required return is calculated using formula,

rs = Rf + Beta*(Rm-Rf)

so, 12.5 = 5.5 + beta*(8.5-5.5)

=> Beta = 2.33

You have been managing a $5 million portfolio that has a beta of 1.05 and a required rate of return of 10.775%. The current risk-free rate is 5%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 1.25, what will be the required return on your $5.5 million portfolio?

Portfolio size = $5 million

Beta = 1.05

required return rs = 10.775%

risk free rate Rf = 5%

So, using CAPM model, market risk premium is calculated using formula,

rs = Rf + Beta*MRP

10.775 = 5 + 1.05*MRP

MRP = 5.5%

New investment of $500000 with beta = 1.25 is made,

So required return rb of this investment using CAPM

So, rb = 5 + 1.25*5.5 = 11.875%

Required return of this $5.5 million portfolio is weighted average return of its assets.

So, Required return of portfolio = 10.775*(5/5.5) + 11.875*(0.5/5.5) = 10.875%