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CAPM and portfolio return You have been managing a $5 million portfolio that has a beta of 1.50 and a required rate of r...

CAPM and portfolio return

You have been managing a $5 million portfolio that has a beta of 1.50 and a required rate of return of 14%. The current risk-free rate is 5.00%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 1.45, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places.

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Answer #1

rate positively ..

Using CAPM we have to compute first the market risk premium
we know that reqiured rate = Risk free rate + market risk premium *Beta
14%= 5%+Market risk premium*1.5
Market risk premium = (14%-5%)/1.5
Market risk premium = 6%
Required rate of return of new stock
5%+6%*1.45
13.70%
Computation of portfolio return
Value weight return weight *return
Existing stock 5 90.91% 14% 12.73%
new stock 0.5 9.09% 13.70% 1.25%
5.5 13.97%
therefore, answer = 13.97%
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