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 2.20%.You now receive another $8.75 million,which you invest in stocks with an average beta of 0.65.What is the required rate of return on the new portfolio? (Hint: You must first find the market risk premium,then find the new portfolio beta. )Do not round your intermediate calculations.
A) 7.13%
B) 8.12%
C) 9.59%
D) 7.30%
E) 8.20%

Question

Quizplus · Accepted Answer

The required rate of return on the original portfolio is given by the Capital Asset Pricing Model (CAPM) formula: Required Return = Risk-Free Rate + Beta * (Market Risk Premium). The Market Risk Premium can be calculated as Required Return - Risk-Free Rate = 9.50% - 2.20% = 7.30%. The new portfolio's total value is $10.00 million + $8.75 million = $18.75 million. The weighted average beta of the new portfolio is calculated as [(1.05 * $10.00 million) + (0.65 * $8.75 million)] / $18.75 million = 0.867. The required rate of return for the new portfolio is then 2.20% + 0.867 * 7.30% = 8.20%.

Assume That You Manage a $10