Question

Check My Work (2 remaining) 8-3: Risk in a Portfolio Context: The CAPM 8-4: 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 1.70 and a required rate of return of 14%. The current risk-free rate is 3.00%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 0.85, what will be the required return on your $5.5 million portfolio? Round your answer to two decimal places. 0%

Answer 1

required return=risk-free rate +Beta*(market rate- risk-free rate)

Currently:

14=3+1.7*(Market rate-3)

(14-3)=1.7*(Market rate-3)

Market rate=(14-3)/1.7+3

=9.47%(Approx)

Hence required return for $500,000=3+0.85*(9.47-3)

=8.5%

Hence required return of portfolio=Respective return*Respective weight

=(5,000,000/5,500,000*14)+(500,000/5,500,000*8.5)

=13.5%