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1. Tom has $300,000 to invest. He invests his money into four stocks with the following...

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Finance

1. Tom has $300,000 to invest. He invests his money into fourstocks with the following betas:

Stock A= $120,000 Beta: 2.15

Stock B= $75,000 Beta: 0.40

Stock C= $50,000 Beta: 0.85

Stock D= $55,000 Beta: 0.66

The risk-free rate is 4%, and the expected market return is 9%Compute the required rate of return on the portfolio.

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4.0 Ratings (691 Votes)

Ans 10.11%

Stock INVESTMENT (i) Beta (ii) Investment* Beta (i)* (ii)
A              1,20,000                     2.15                         2,58,000.00
B                 75,000                     0.40                            30,000.00
C                 50,000                     0.85                            42,500.00
D                 55,000                     0.66                            36,300.00
Total              3,00,000                         3,66,800.00
AVERAGE BETA = (INVESTMENT * BETA) / TOTAL INVESMENT
366800 / 300000
1.222666667
Expected Return = Risk free Return + (Market Return - Risk free return)* Beta
Expected Return = 4% + (9% - 4%) *1.222666667
Expected Return = 10.11%
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