The risk free rate is 5% and the market risk premium is 10%. The Ka equals 25% and the Kb equals 20%. What is the beta of a portfolio that contains only stocks A and B if 1/5 of funds are invested in A and the rest in B?
Instructors answer is Beta of portfolio equals 1.6
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By CAPM, the stock's required return rate is
K = risk free rate + beta * market risk premium
Thus, beta = (K - risk free ...
This solution provides calculations for betas in capital asset pricing.