Problem 10-27 Portfolio Beta and Required Return (LG3) You hold the postions in

Question

Problem 10-27 Portfolio Beta and Required Return (LG3) You hold the postions in the table below. Amazon com Family Dolar Stores McKesson Corp Schering-Plcugh Corp 5 40.80 10038 30.10150 1.2 75 04 23.802000.5 57.40 What is the beta of your portlola? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Partfolio beta 131 If yud expect the market to earn 12 percent and the risk-froe rate is 3.5 percent, whst is the required retun of the portfolo? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Required rehm 14.64% References eBook & Resources Workshee Problem 0-27 Porttolo Beds Requred Fe (LG3 Check.my.woc

Explanation / Answer

****Answers mentioned in problem are not accurate*****

1. Calculation of Beta

As a first step we need to find the weight of each stock in the portfolio. The same is done as below

Amazon 40.8 100 40.8 * 100 = 4080

FDS 30.1 150 30.1 * 150 = 4515

MCK 57.4 75 57.4 * 75 = 4305

SPC 23.8 200 23.8 * 200 = 4760

Total value of portfolio = 4080 + 4515 + 4305 + 4760 = 17660

Weights in portfolio

Amazon 4080 / 17660 = 0.2310

FDS 4515 / 17660 = 0.2557

MCK 4305 / 17660 = 0.2438

SPC 4760 / 17660 = 0.2695

Find the weighted average Beta for the portfolio = Sum of (weight * corresponding Beta)

Portfolio beta = 0.2310 * 3.8 + 0.2557 * 1.2 + 0.2438 * 0.4 + 0.2695 * 0.5 = 1.41

Answer is 1.41

b. Calculate required return on portfolio

Rm (market return) = 12%; Rf (risk - free rate) = 3.5%

Using the CAPM equation

= Rf + Beta (Rm - Rf) = 3.5% + 1.41 * (12% - 3.5%) = 15.48%

Answer is 15.48%

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