Chapter 08 End-of-Chapter Problems row at 10 PM EDT Score: 2500% Check My Work (

Question

Chapter 08 End-of-Chapter Problems row at 10 PM EDT Score: 2500% Check My Work (a remaining) CAPM and portfolio retum You hve been managing a ss million portfolio that has a beta of .95 and a required rate of return of i2%. The current risk-free rate is 3.50%. Assume that you receive another $500,000 if you nvest the money in a stock with a beta of 1.90, what will be the required return on your $5.5 million portfolio? Do net round intermediate calculations. Round your answer to two decimal places Check My Work (1 remaining)

Explanation / Answer

The Required Return on new $5.5 Million Portfolio = 11.96%

Computations

Step – 1, Calculate the Risk Premium (Rm – Rf)

R = Rf + Beta [Rm – Rf]

12% = 3.50% + 1.95 [Rm – Rf]

[Rm – Rf] = [ 12% - 3.50%] / 1.95

[Rm – Rf] = 4.36%

Step – 2, Calculate the Overall Beta of the New Portfolio

Overall Beta = 1.95 x [ $50,00,000 / 55,00,000] + 1.90 x [ $500,000 / 55,00,000]

= 1.77 + 0.17

= 1.94

Overall Beta = 1.94

Step – 3, Calculate the Required Return on $5.50 Million Portfolio

Required Return = Rf + [ Beta x Risk Premium ]

= 3.50% + [ 1.94 x 4.36% ]

= 3.50% + 8.46%

= 11.96%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.