Check My Work (2 remaining) Click here to read the eBook: Risk in a Portfolio Co

Question

Check My Work (2 remaining) Click here to read the eBook: Risk in a Portfolio Context: The CAPM Click here to read the eBook: 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 í í%. The current risk-free rate is 4.25%. As me that you rece 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 caloulations. Round your answer to two decimal places. 5.28

Explanation / Answer

The beta for the new $5.5M portfolio will be a weighted average of the beta for the old $5.0M portion and the newer $500K portion:

b = (1.70)*(5,000,000/5,500,000) + (1.15)*(500,000/5,500,000)
= 1.545 + 0.1045
= 1.65

to get the required rate of return on the market (Km) :
11=4.25+1.70(Km-4.25)
Km=8.22

Using a beta of 1.65:
Kp = 4.25 + (1.65)*(8.22 - 5.25)

= 9.15%

Hence required rate of return on $5.5million is 9.15%.

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