Question

Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 30% standard deviation of expected returns. Stock Y has a 12.0% expected return, a beta coefficient of 1.1, and a 30.0% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.

Calculate the required return of a portfolio that has $7,500 invested in Stock X and $5,500 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places. rp = %

Note the answer 10.85 and 10.94 does not work. Can anyone help me for calculation

Answer 1

Rm-Rf = RISK PREMIUM = 5%, Rf = RISK FREE RATE = 6%

REQUIRED RETURN ON STOCK A = Rf + beta(Rm-Rf) = 6% +0.8(5%) = 10%

REQUIRED RETURN ON STOCK B = Rf + beta(Rm-Rf) = 6% +1.1(5%) = 11.5%

RETURN ON PORTFOLIO = rp = weight of stock A x return on A +  weight of stock B x return on B

RETURN ON PORTFOLIO = rp = (7500/(7500+5500)) x 10% +  (5500/(7500+5500)) x 11.5%

RETURN ON PORTFOLIO = rp = 5.7692% + 4.8654% = 10.6346% = 10.63%

ANSWER : 10.63% (Thumbs up please)