An investor currently holds the following portfolio:

If the risk-free rate of return is 2% and the market risk premium is 7%,then the required return on the portfolio is
A) 14.91%.
B) 15.93%.
C) 21.91%.
D) 23.93%.

Question

An investor currently holds the following portfolio:

If the risk-free rate of return is 2% and the market risk premium is 7%,then the required return on the portfolio is
A) 14.91%. 
B) 15.93%. 
C) 21.91%. 
D) 23.93%.

Quizplus · Accepted Answer

To find the required return on the portfolio, we can use the Capital Asset Pricing Model (CAPM):

Required return = Risk-free rate + Beta * (Market risk premium)

To find the Beta of the portfolio, we need to first find the weights of each stock:

Stock A: 30% of the portfolio
Stock B: 50% of the portfolio
Stock C: 20% of the portfolio

Using these weights, we can calculate the Beta of the portfolio:

Beta = (30% * 0.8) + (50% * 1.2) + (20% * 1.6) = 1.24

Now we can plug in the numbers to the CAPM formula:

Required return = 2% + 1.24 * 7% = 15.93%

Therefore, the best choice is B.

An Investor Currently Holds the Following Portfolio