a manager believes his firm will earn a 14.90 percent return next year. just fir

Question

a manager believes his firm will earn a 14.90 percent return next year. just firm has a beta of 1.43, the expected return on the market is 11.40 percent, and the risk-free rate is 4.40 percent. compute the return the firm should earn given its level of risk 
required return()%
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you own $20,900 of human genome stock that has an assumed beta of 3.99. you also own $11,020 of frozen food express (assumed beta=1.96) and $6,080 of Molecular Devices (assumed beta=0.92)
what is the beta of your portfolio?
portfolio beta ()

Explanation / Answer

Requirement: 1

According to CAPM methodology,

E(R) = Rf + B (Rm - Rf)

Where, E(R) = Expected return

Rf = Risk free rate = 4.40 % = 0.044

B = Beta = 1.43

Rm = Expected market return = 11.40 % = 0.114

E(R) = 0.044 + 1.43 x (0.114 – 0.044)

       = 0.044 + 1.43 x 0.07

       = 0.044 + 0.1001

       = 0.1441 or 14.41 %

Requirement: 2

Total value of portfolio can be calculated by adding individual values as:

Total value of portfolio = $ 20,900 + $ 11,020 + $ 6,080

                                       = $ 38,000

Weight of each stock in portfolio:

Weight of human genome = $ 20,900 / $ 38,000 = 0.55 or 55 %

Weight of frozen food express = $ 11,020 / $ 38,000 = 0.29 or 29 %

Weight of Molecular Devices = $6,080 / $ 38,000 = 0.16 or 16 %

Beta of portfolio = (0.55 × 3.99) + (0.29 × 1.96) + (0.16 × 0.92)

                               = 2.1945 + 0.5684 + 0.1472 = 2.9101 or 2.91

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