An investor is forming a portfolio by investing $50,000 in stock A which has a beta of 1.50, and $25,000 in stock B which has a beta of 0.90. The return on the market is equal to 6 percent and Treasury bonds have a yield of 4 percent. What is the required rate of return on the investor's portfolio?
A) 6.6%
B) 6.8%
C) 5.8%
D) 7.0%
E) None of the answers above is correct.

Question

Quizplus · Accepted Answer

The required rate of return on the investor's portfolio is 6.6%. This is calculated using the Capital Asset Pricing Model (CAPM), which states that the required rate of return on a portfolio is equal to the risk-free rate plus the beta of the portfolio times the market risk premium. In this case, the risk-free rate is 4%, the beta of the portfolio is 1.20, and the market risk premium is 2% (6% - 4%). Therefore, the required rate of return on the investor's portfolio is 4% + 1.20 * 2% = 6.6%.

An Investor Is Forming a Portfolio by Investing $50,000 in Stock