A portfolio manager has a $10 million portfolio, which consists of $1 million invested in 10 separate stocks. The portfolio beta is 1.2. The risk-free rate is 5% and the market risk premium is 6%.
____ 6. What is the portfolio's required return?
____ 7. The manager sells one of the stocks in her portfolio for $1 million. The stock she sold has a beta of 0.9. She takes the $1 million and uses the money to purchase a new stock that has a beta of 1.6. What is the required return of her portfolio after purchasing this new stock?
6. Using CAPM
Required return = Rf + (Rm-Rf) beta
Required return = 5% + 6% X 1.2 = ...
The solution explains two multiple choice questions relating to required return