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 calculate the required return on the portfolio, we need to use the Capital Asset Pricing Model (CAPM):

Expected Return = Risk-Free Rate + Beta x Market Risk Premium

First, we need to calculate the portfolio beta. Since we are not given the individual betas of the securities in the portfolio, we have to use the portfolio weights to calculate the portfolio beta:

Portfolio Beta = (Weight of Stock A x Beta of Stock A) + (Weight of Stock B x Beta of Stock B) + (Weight of Stock C x Beta of Stock C)

= (0.30 x 0.9) + (0.40 x 1.2) + (0.30 x 1.5) = 1.23

Next, we can use the given risk-free rate and market risk premium to calculate the expected return:

Expected Return = 2% + 1.23 x 7% = 15.91%

Therefore, the required return on the portfolio is 15.91%, which is closest to option B (15.93%).

An Investor Currently Holds the Following Portfolio: If the Risk-Free