Click here to read the eBook: Risk in a Portfolio Context: The CAPM Click here t
ID: 2618869 • Letter: C
Question
Click here to read the eBook: Risk in a Portfolio Context: The CAPM Click here to read the eBook: The Relationship Between Risk and Rates of Retunm CAPM AND PORTFOLIO RETURN You have been managing a $5 million portfolio that has a beta of 1.70 and a required rate of return of 11%. The arent risk-free rate is 4,25%. Assume that you receve another $500,000. If you invest the money in a stock with a beta of 1.15, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places. 5.28 | 0%Explanation / Answer
$5 million portfolio:
Beta = 1.70
Required Return = 11%
Risk-free Rate = 4.25%
Required Return = Risk-free Rate + Beta * Market Risk Premium
11% = 4.25% + 1.70 * Market Risk Premium
6.75% = 1.70 * Market Risk Premium
Market Risk Premium = 3.971%
$5.5 million portfolio:
Weight of New Stock = $0.5 million / $5.5 million = 1/11
Weight of Old Portfolio = $5.0 million / $5.5 million = 10/11
New Portfolio Beta = Weight of Old Portfolio * Beta of Old Portfolio + Weight of New Stock * Beta of New Stock
New Portfolio Beta = (10/11) * 1.70 + (1/11) * 1.15
New Portfolio Beta = 1.65
New Portfolio Required Return = Risk-free Rate + New Portfolio Beta * Market Risk Premium
New Portfolio Required Return = 4.25% + 1.65 * 3.971%
New Portfolio Required Return = 10.80%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.