Question

Your portfolio consists of $86,454 invested in a stock that has a beta = 1.3, $82,502 invested in a stock that has a beta = 0.5, and $25,655 invested in a stock that has a beta = 1.5. The risk-free rate is 2.4%. Last year this portfolio had a required return of 7.4%. This year, nothing has changed except that the market risk premium has increased by 3.4%. What is the portfolio’s current required rate of return?

a. 7.72%
b. 7.84%
c. 8.15%
d. 8.29%

Answer 1

To calculate the portfolio's current required rate of return, we need to consider the beta of each stock and the risk-free rate. The formula for calculating the required rate of return is: Risk-free rate + Beta of stock 1 × Market risk premium + Beta of stock 2 × Market risk premium + Beta of stock 3 × Market risk premium. Using the given information, the calculation would be: Required rate of return = 2.4% + 1.3 × 3.4% + 0.5 × 3.4% + 1.5 × 3.4%. Simplifying the calculation, we get: Required rate of return = 2.4% + 4.42% + 1.7% + 5.1% = 13.62%. Therefore, the portfolio's current required rate of return is 13.62%.

Step-by-step explanation:

To calculate the portfolio's current required rate of return, we need to consider the beta of each stock and the risk-free rate. The formula for calculating the required rate of return is:

Risk-free rate + Beta of stock 1 × Market risk premium + Beta of stock 2 × Market risk premium + Beta of stock 3 × Market risk premium

Using the given information, the calculation would be:

Required rate of return = 2.4% + 1.3 × 3.4% + 0.5 × 3.4% + 1.5 × 3.4%

Simplifying the calculation, we get:

Required rate of return = 2.4% + 4.42% + 1.7% + 5.1% = 13.62%

Therefore, the portfolio's current required rate of return is 13.62%.