Question

Stock A has a beta of 1.5, but Stock B has a beta of 0.5. You expect the market to increase by 7.5 percent and you could earn 2.0 percent in a risk-free asset. What is the required return for each stock? If you invest $3,500 in Stock A and $6,500 in Stock B, what is the portfolio beta?

Answer 1

Calculate the required return for stock A as follows:

Required return = Risk free rate + (beta *(Market rate - Risk free rate))

= 2% + (1.5 * (7.5%-2%))

= 10.25%

Required return of stock A is 10.25%.

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Calculate the required return for stock B as follows:

Required return = Risk free rate + (beta *(Market rate - Risk free rate))

= 2% + (0.5 * (7.5%-2%))

= 4.75%

Required return of stock B is 4.75%.

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Calculate the portfolio beta as follows:

Therefore, the portfolio beta is 0.85.

Formulas: