Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / Use this same data and your solution, in the next question, also: Mars Corp
Use this same data and your solution, in the next question, also:
Mars Corp. has a Beta of 2.0 while 30-day Treasury bills are yielding a return of 4.5%. The expected return on "The Market" is 15%.
Calculate the required return for Mars Corp.
Use your solution from the previous question:
Mars Corp has a Beta of 2.0 while 30-day Treasury bills are yielding a return of 4.5%. The expected return on "The Market" is 15%. If you created a portfolio out of this stock and Jupiter Company, which has a beta of 1.0, putting half of your money into each stock,
What is the required rate of return for the combined portfolio?
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%
