Answer:
11.419%
Step-by-step explanation:
Given that,
Risk-free rate = 5.4
Market risk premium = 5
Portfolio = $1 million = $1,000,000
Amount invested in stock A = $218,000
Beta A = 0.5
Amount invested in stock B = $1,000,000 - $218,000
= $782,000
Remainder invested in stock B that has a beta = 1.4
Portfolio beta:
= [(Amount in A × Beta of A) + (Amount in B × Beta of B)] ÷ Total Amount
= [($218,000 × 0.5) + ($782,000 × 1.4)] ÷ $1,000,000
= ($109,000 + $1,094,800) ÷ $1,000,000
= 1.2038
Required return:
= Risk free rate + (Beta × Market risk premium)
= 5.4% + (1.2038 × 5%)
= 5.4% + 6.019%
= 11.419%
Therefore, the required return on this portfolio is 11.419%