Question

Assume that you manage a $10.00 million mutual fund that has a beta of 1.05 and a 9.50% required return. The risk-free rate is 4.20%. You now receive another $5.00 million, which you invest in stocks with an average beta of 0.65. What is the required rate of return on the new portfolio

Answer 1

8.83%

Step-by-step explanation:

The computation of the required return is shown below;

The market risk premium is

= 9.5% - 4.2% ÷ 1.05

= 5.048%

Now

beta of portifolio is

= 10 ÷ 15 × 1.05 + 5 ÷ 15 × 0.65

= 0.9167

And, finally

required return is

= 4.2% + 0.9167 × 5.048%

= 8.83%