Your portfolio consists of $100,000 invested in a stock which has a beta = 0.8, $150,000 invested in a stock which has a beta = 1.2, and $50,000 invested in a stock which has a beta = 1.8. The risk-free rate is 7 percent. Last year this portfolio had a required rate of return of 13 percent. This year nothing has changed except for the fact that the market risk premium has increased by 2 percent (two percentage points). What is the portfolio's current required rate of return?
A) 5.14%
B) 7.14%
C) 11.45%
D) 15.33%
E) 16.25%

Question

Quizplus · Accepted Answer

The portfolio beta is calculated as a weighted average of the individual betas: (0.8 * 100,000 + 1.2 * 150,000 + 1.8 * 50,000) / 300,000 = 1.2. The market risk premium increased by 2%, so the new market risk premium is 6% + 2% = 8%. The required rate of return is calculated using the CAPM formula: Risk-free rate + (Portfolio beta * Market risk premium) = 7% + (1.2 * 8%) = 15.33%.

Your Portfolio Consists of $100,000 Invested in a Stock Which