Click here to read the eBook: Risk in a Portfolio Context: The CAPM Click here t

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 Return CAPM AND PORTFOLIO RETURN You have been managing a $5 million portfolio that has a beta of 1.15 and a required rate of return of 16%. The current risk-free rate is 7.25%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 1.75, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places

Explanation / Answer

Solution: Portfolio $5million Beta 1.15 return 16% Risk free rate 7.25% Another $500000 Beta 1.75 Required Return on $5.5Million ? rM= (r-Rrf)/b + Rrf Market rate of return =(Return -Riskfree rate)/beta +Risk free rate (16%-7.25%)/1.15+7.25% 0.148586957                                                    14.86 % r1=Rrf+(rM-Rrf)b Return =Riskfree rate +(Market rate of return- Risk free rate)Beta of stock 7.25%+(14.86%-7.25%)*1.75 0.205675                                                    20.57 % r=w1r1+w2r2 Total amount of Portfolio is $5.5 Million Consisting of $5Million and $0.5 Million Therfore return = 5/5.5*16%+0.5/5.5*20.57% 0.164154545                                                    16.42 %

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