Fund has 10 million portfolio and has 5 stocks. Has required return of 12 % and

Question

Fund has 10 million portfolio and has 5 stocks. Has required return of 12 % and market risk premium is 6 %.

       invested                     beta

A    3 milllion                      1.5

B     2 million                      1.1

C     2million                       1.0

D       1 million                    .8

E       2 million                    .5

A) what is the portfolio beta?

B) Use SML and porfolios required rate of return to calculate risk free rate.

C) What is the required return of stock c using the SML equation?

Explanation / Answer

Hi,

Please find the answers as follows;

Part A:

Portfolio Beta = 1.5*(3/10) + 1.1*(2/10) + 1*(2/10) + .8*(1/10) + .5*(2/10) = 1.05

Part B:

12% = Rf + 1.05*(6)

Rf = 12 - 6.3 = 5.7%

Risk Free Rate = 5.7%

Part C:

Required return of Stock C = 5.7 + 1*(6) = 11.7%

Thanks.

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