You have been managing a $5 million portfolio that has a beta of 1.45 and a required rate of return of 12.425%. The current risk-free rate is 3%. Assume that you receive 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.
Required return=risk free rate+beta*(market rate-risk free rate)
Currently:
12.425=3+1.45*(market rate-3)
(12.425-3)=1.45*(market rate-3)
market rate=(12.425-3)/1.45+3
=9.5%
Hence required return for $500,000=3+1.15*(9.5-3)
=10.475%
Portfolio return=Respective return*Respective weight
=(5,000,000/5,500,000*12.425)+(500,000/5,500,000*10.475)
=12.25%(Approx)
You have been managing a $5 million portfolio that has a beta of 1.45 and a...
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