Find the required return on each stock using the CAPM (capital assets | |||||
pricing model) and then find the required return for the fund. | |||||
Under the Capital Asset pricing model | |||||
Rs = Rf + Beta*(Rm-Rf) | |||||
Rs = Return on security | |||||
Rf = risk free rate | |||||
Rm = required return on market | |||||
Stock A | |||||
Rf | 0.06 | ||||
Rm | 0.1 | ||||
Beta | 1.5 | ||||
Rs = .06 + 1.5*(.1 - .06) | |||||
Rs | 0.12 | ||||
Stock B | |||||
Rf | 0.06 | ||||
Rm | 0.1 | ||||
Beta | -0.5 | ||||
Rs = .06 + (-.5)*(.1 - .06) | |||||
Rs | 0.04 | ||||
Stock C | |||||
Rf | 0.06 | ||||
Rm | 0.1 | ||||
Beta | 1.25 | ||||
Rs = .06 + 1.25*(.1 - .06) | |||||
Rs | 0.11 | ||||
Stock D | |||||
Rf | 0.06 | ||||
Rm | 0.1 | ||||
Beta | 0.75 | ||||
Rs = .06 + .75*(.1 - .06) | |||||
Rs | 0.09 | ||||
Stock | Investment | Portfolio weight | Beta | Rs | Portfolio weight*Rs |
A | 360000 | 9.14% | 1.5 | 0.12 | 0.0110 |
B | 550000 | 13.96% | -0.5 | 0.04 | 0.0056 |
C | 980000 | 24.87% | 1.25 | 0.11 | 0.0274 |
D | 2050000 | 52.03% | 0.75 | 0.09 | 0.0468 |
SUM | 3940000 | SUM | 0.0907 | ||
Find the portfolio weight for each stock in the portfolio | |||||
and multiply that by Rs(required return) for each stock. | |||||
Add the resulting values. | |||||
The sum of the resulting values is the required return for the portfolio. | |||||
The required return of the portfolio is .0907. | |||||
The required return of the portfolio is 9.07%. |
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