Your portfolio is made up of R50 000 invested in a share with a beta of 1,8, R100 000 invested in a share with a beta of 0,8, and R150 000 invested in a share with a beta of 1,2. The risk-free interest rate is 7%. This portfolio last year had a required rate of return of 13%. This year, nothing has changed except for the fact that the market risk premium has increased by 2 percent (two percentage points). What is the portfolio's current required rate of return? 1. 7,14% 2. 11,45% 3. 15,33% 4. 16,25
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.
Your portfolio is made up of R50 000 invested in a share with a beta of 1,8, R100 000 invested in a share with a beta of 0,8, and R150 000 invested in a share with a beta of 1,2. The risk-free interest rate is 7%. This portfolio last year had a required
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