Use this same data and your solution, in the next question, also: Mars Corp

Please find the below explanation and “ Don’t forget to give a like! Thank you”

Answer:

1)

Given,

Risk free rate = 4.5%

Beta = 2

Market return = 15%

As per Capital asset pricing model(CAPM)

Required return = Risk free rate + Beta * (Market return – Risk free rate)

   = 4.5% + 2 * (15% – 4.5%)

    = 4.5% + 2 * (10.5%)

= 4.5% + 21%

= 25.5%

Required return for Mars Corp is 25.5%

2)

Required return for Mars Corp is 25.5%

Calculation of Required return for jupiter company

Beta = 1

Market return = 15%

Risk free rate = 4.5%

Required return = Risk free rate + Beta * ( Market return – Risk free rate)

= 4.5% + 1 * ( 15% – 4.5%)

= 4.5% + 1 * (10.5%)

= 4.5% + 10.5%

= 15%

Required return for Jupiter company is 15%

If you invest 50% of your money in each stock then,

Weight of  Mars Corp. is 0.50 and weight of Jupiter company is 0.50

Required rate of return = (weight * required return of Mars Corp.) + (weight * required return

of Jupiter company)

= (0.50 * 25.5%) + (0.50 * 15%)

= 12.75% + 7.5%

= 20.25%

The Required rate of return for the combined portfolio is 20.25%