##### Financing Easy Question

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You have been managing a \$5 million portfolio that has a beta of 1.70 and a required rate of return of 10%. The current risk-free rate is 4.25%. Assume that you receive another \$500,000. If you invest the money in a stock with a beta of 1.90, what will be the required return on your \$5.5 million portfolio? Round your answer to two decimal places.

Oct 17th, 2017

First we need to solve for the market risk premium from the \$5 million portfolio. We solve for Rm in the following formula: 10% = 4.25% + (Rm - 4.25%) x 1.70. Solving for Rm we get a market risk premium of 7.63%. Now we need to solve for the required return on the \$500,000. We solve for expected return in the following formula: expected return = 4.25% + (7.63% - 4.25%) x 1.90 = 10.68%. Now we solve for the expected return of the portfolio. The expected return is the weighted average return of the two stocks. That is, \$500,000/\$5,500,000 x 10.68% + \$5,000,000/\$5,500,000 x 10% = 10.06%. The expected return of the portfolio is 10.06%.

Apr 10th, 2015

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Oct 17th, 2017
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Oct 17th, 2017
Oct 18th, 2017
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