Ken Howard has a two stock portfolio consisting of Acton Inc. and Boron Corp. Assume the following conditions exist. $\begin{array}{l}
\text {Return on the market }&=13 \% \
\text {3 month Treasury bill rate }&=6 \% \
\text { Acton's beta}&=1.15 \
\text {Boron's beta }&=1.40\
\text { Market value of Ken's investment in Acton}&=\$ 125,000 \
\text {Market value of Ken's investment in Boron }&=\$ 250,000 \
\text { }&\$ 375,000
\end{array}$ What does the SML predict is Ken's required rate of return for the overall portfolio?
A) 15.24%
B) 14.93%
C) 23.12%
D) 20.90%

Question

Quizplus · Accepted Answer

The required rate of return for the portfolio is calculated using the Capital Asset Pricing Model (CAPM): $ R_p = R_f + \beta_p (R_m - R_f) $. The portfolio beta ($\beta_p$) is a weighted average of the individual betas: $\beta_p = (125,000/375,000) \times 1.15 + (250,000/375,000) \times 1.40 = 1.3167$. Plugging into the CAPM formula: $ R_p = 6\% + 1.3167 \times (13\% - 6\%) = 15.24\%$.

Ken Howard Has a Two Stock Portfolio Consisting of Acton