A money manager is managing the account of a large investor; the investor holds the following stocks:
STOCK AMOUNT INVESTED ESTIMATED BETA
A $2,000,000 0.80
B $5,000,000 1.10
C $3,000,000 1.40
D $5,000,000 ????
The portfolio's required rate of return is 17%; the risk-free rate is 7% and the required return on the average stock in the market is 14%.
Calculate Stock D's estimated beta.
Show all work.© BrainMass Inc. brainmass.com March 4, 2021, 5:46 pm ad1c9bdddf
First we calculate the portfolio Beta using SML:
ER = Rf+(Rm-Rf)*Beta
i.e. 17 = 7 + (14-7)*Beta or 10 = 7*B
Then Beta = ...
This solution assists with calculating Stock D's estimated beta.