What will the required rate of return on the new portfolio be after the purchase of DEF stock? (Hint: Compute a new portfolio beta first and then use the CAPM.) Group of answer choices 9.80% 9.61% 9.94% 9.32% 9.11%
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
ABC Company holds a well-diversified portfolio in the amount of $90,000 that has an expected return of 11.0% and a beta of 1.27. It is buying 1,000 shares of DEF Company stock at $10 a share and adding them to its portfolio. DEF Company has an expected return of 13.0% and a beta of 1.57. Currently, the risk free rate is 3.5%, and the stock market return is 8.2%.
What will the required
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