In: Finance
An investor is forming a portfolio by investing $50,000 in stock A which has a beta of 1.50, and $25,000 in stock B which has a beta of 0.90. The return on the market is equal to 6% and treasure bonds have a yield of 4% (rRF). What’s the portfolio beta?
0.60 |
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1.30 |
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1.40 |
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1.80 |
Using the information from above, what’s the required rate of return on the investor’s portfolio?
5.2% |
||
5.8% |
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6.6% |
||
7.4% |
Given,
Investment in stock A = $50000
Stock A beta = 1.50
Investment in stock B = $25000
Stock B beta = 0.90
Return on the market = 6%
Risk free rate = 4%
Solution :-
Total investment = Investment in stock A + Investment in stock B
= $50000 + $25000 = $75000
Weight of stock A = $50000/$75000 = 2/3
Weight of stock B = 1 - 2/3 = 1/3
Now,
Portfolio beta = (weight of stock A x stock A beta) + (weight of stock B x stock B beta)
= (2/3 x 1.50) + (1/3 x 0.90)
= 1 + 0.30 = 1.30
Required rate of return = Risk free rate + (portfolio beta) x (return on the market - risk free rate)
= 4% + (1.30) x (6% - 4%)
= 4% + (1.30) x (2%)
= 4% + 2.6% = 6.6%