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1. Tom has $300,000 to invest. He invests his money into four stocks with the following...

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Finance

1. Tom has $300,000 to invest. He invests his money into fourstocks with the following betas:
Stock A= $120,000 Beta: 2.15
Stock B= $75,000 Beta: 0.40
Stock C= $50,000 Beta: 0.85
Stock D= $55,000 Beta: 0.66
The risk-free rate is 4%, and the expected market return is 9%Compute the required rate of return on the portfolio.

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Ans 10.11%

Stock	INVESTMENT (i)	Beta (ii)	Investment* Beta (i)* (ii)
A	Â Â Â Â Â Â Â Â Â Â Â Â 1,20,000	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 2.15	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 2,58,000.00
B	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 75,000	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.40	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 30,000.00
C	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 50,000	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.85	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 42,500.00
D	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 55,000	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.66	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 36,300.00
Total	Â Â Â Â Â Â Â Â Â Â Â Â 3,00,000		Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 3,66,800.00


AVERAGE BETA =	(INVESTMENT * BETA) / TOTAL INVESMENT
	366800 / 300000
	1.222666667

Expected Return =	Risk free Return + (Market Return - Risk free return)* Beta
Expected Return =	4% + (9% - 4%) *1.222666667
Expected Return =	10.11%

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