Unformatted text preview: If she goes ahead with this planned transaction, what will be the required return of her new portfolio? Calculate the portfolio’s current beta: R = r rf + (r m – r rf )β 12 = 5.5 + 6β 1.0833 = β The portfolio beta is the weighted average of the betas of the individual stocks in the portfolio. If you sell $3 million of a stock that has a beta of 1.6, what will be the beta of the remaining stocks? Calculate the beta of the remaining stocks in the portfolio: 1.0833 = (3/10)(1.6) + (7/10)X 0.6033 = 0.7X 0.8619 = X 0.8619 is the beta of the $7 million of stocks that remain. Now what happens to the portfolio beta when the new stock is added? Calculate the new portfolio’s beta β = (7/10)(0.8619) + (3/10)(0.7) = 0.6033 + 0.21 = 0.8133 Calculate the new portfolio’s required return: R = r rf + (r m – r rf )β = 5.5 + ^ x 0.8133 = 10.38%...
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This note was uploaded on 02/22/2011 for the course BMGT 340 taught by Professor White during the Spring '08 term at Maryland.
- Spring '08