1. Your investment club has only two stocks in its portfolio. $30,000 is invested in a stock with a beta of 0.4, and $80,000 is invested in a stock with a beta of 1.8. What is the portfolio's beta? Round your answer to two decimal places.
2. AA Corporation’s stock has a beta of 2.2. The risk-free rate is 6% and the expected return on the market is 11%. What is the required rate of return on AA's stock? Round your answer to two decimal places.
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3.
Required Rate of Return
Suppose rRF = 4%, rM = 8%, and rA = 11%.
Please show step by step. Thank you.
Solution to QUESTION-1
Portfolio Beta = Sum(Beta x Percentage of the Portfolio)
= [Beta of Stock 1 x Proportion of the amount invested in Stock 1] + [Beta of Stock 2 x Proportion of the amount invested in Stock 2]
= [0.40 x ($30,000/$110,000)] + [1.80 x ($80,000/$110,000)]
= [0.40 x 0.2727] + [1.80 x 0.7273]
= 0.11 + 1.31
= 1.42
“Hence, the Portfolio Beta will be 1.42”
Solution to QUESTION-2
As per Capital Asset Pricing Model [CAPM], the required rate of return for the stock is calculated by using the following equation
Required rate of return for the stock = Risk-free Rate + Beta[Market rate of return – Risk-free rate]
= Rf + B[Rm – Rf]
= 6.00% + 2.20[11.00% - 6.00%]
= 6.00% + [2.20 x 5.00%]
= 6.00% + 11.00%
= 17.00%
“Hence, the required rate of return on AA's stock will be 17.00%”
1. Your investment club has only two stocks in its portfolio. $30,000 is invested in a...
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