You hold the positions in the following table.If you expect the market to earn 14 percent and the risk-free rate is 5 percent,what is the required return of the portfolio?
A) 20.21 percent
B) 22.66 percent
C) 28.66 percent
D) 32.48 percent

Question

You hold the positions in the following table.If you expect the market to earn 14 percent and the risk-free rate is 5 percent,what is the required return of the portfolio? 
A) 20.21 percent 
B) 22.66 percent 
C) 28.66 percent 
D) 32.48 percent

Quizplus · Accepted Answer

For the portfolio, determine the total value of the portfolio and the weights of each stock in the portfolio:
Total value = $20.50 × 100 + $36.20 × 150 + $60.70 × 75 + $28.40 × 200 = $17,712.50.
Website.com weight = $20.50 × 100/$17,712.50 = 11.57%.
Budget weight = $36.20 × 150/$17,712.50 = 30.66%.
Manufacturing weight = $60.70 × 75/$17,712.50 = 25.70%.
Pharmacy weight = $28.40 × 200/$17,712.50 = 32.07%.
Now compute the portfolio beta = 0.1157 × 3.2 + 0.3066 × 1.5 + 0.2570 × 2.4 + 0.3207 × 0.75 = 1.6875.
So the portfolio's required return = 5% + 1.69 × (14% − 5%) = 20.21%.

You Hold the Positions in the Following Table