Jimenez, Angel Kaye BSA-2nd Year September 28, 2020

ACC 216 9:45-11:45

CAPM: Portfolio Beta; Required Rates of Return
Instruction: Determine the correct answer from the given choices. Show supporting computations.
Problem 1
Mikkelson Corporation's stock had a required return of 11.75% last year, when the risk-free rate was
5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the
market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the
company's new required rate of return? (Hint: First calculate the beta, then find the required return.)
a. 14.38%
b. 14.74%
c. 15.11%
d. 15.49%
e. 15.87%
Given:
Given:
Risk-free rate = 5.50%
Risk-free rate = 5.50%
Beta = 1.315789
Old market risk premium = 4.75%
New market risk premium = 6.75%
Old required return = 11.75%
New required return = ?
(old return−R f )
b= New Required Return=R RF + ( b ) (R PM )
old RP M
New Required Return=5.50 %+(1.32)(6.75 % )
(11.75 %−5.50 % )
b= New Required Return=5.50 %+8.881575 %
4.75
6.25 New Required Return=¿14.38158
b=
4.75
b=1.315789
b=1.3 2
Problem 2
Assume that you manage a P10.00 million mutual fund that has a beta of 1.05 and a 9.50% required
return. The risk-free rate is 4.20%. You now receive another P5.00 million, which you invest in stocks
with an average beta of 0.65. What is the required rate of return on the new portfolio? (Hint: You must
first find the market risk premium, then find the new portfolio beta.)
a. 8.83%
b. 9.05%
c. 9.27%
d. 9.51%
e. 9.74%
Given Given:
Old funds = $10,000,000 New portfolio Required Return =?
New funds (millions) = $5,000,000 Old portfolio's beta =1.05
Required return, old stocks = 9.50% New stocks' beta =0.650
Risk-free rate = 4.20% New portfolio beta =0.9167
Old Beta = 1.05

Market risk Premium=r RF +(b)( R PM ) New Portfolio Required Return=r RF +( new beta)(R PM )
9.5 %=4.2 %+(1.05)( R PM ) New Portfolio Required Return=4.20 %+(0.9167)(5.05)
9.5 %−4.2 % New Portfolio Required Return=4.20 %+ 4.629335
R PM =
1.05
New Portfolio Required Return=8.829335
R PM =5.05 %
New Portfolio Required Return=8.83

New Portfolio Beta

Funds Weighted Beta New Portfolio Beta

a b = a / Total Amount c bxc
Old 10 million (10M / 15M) = 2/3 1.05 0.7
New 5 million (5M / 15M) = 1/3 0.65 0.2167
Total 15 million New Portfolio Beta = 0.9167

Problem 3
Assume that you are the portfolio manager of the SF Fund, a P3 million hedge fund that contains the
following stocks. The required rate of return on the market is 11.00% and the risk free rate is 5.00%.
What rate of return should investors expect (and require) on this fund?
Stock Amount Beta
A P1,075,000 1.20
B 675,000 0.50
C 750,000 1.40
D 500,000 0.75
P3,000,000
a. 10.56% b. 10.83% c. 11.11% d. 11.38% e. 11.67%
Given:
Required market return = 11.00%
Risk free rate = 5.00%
Market Risk Premium=R M +r RF

Market Risk Premium=11% +5 %

Market Risk Premium=6 %
New Portfolio Beta

Stock Amount Weighted Beta New Portfolio Beta

a b c = b / Total Amount d e=cxd
A P1,075,000 (1.75M / 3M) = 43/120 1.20 0.43
B 675,000 (675K / 3M) = 9/40 0.50 0.1125
C 750,000 (750K / 3M) = 1/4 1.40 0.35
D 500,000 (500K / 3M) = 1/6 0.75 0.125
P3,000,000 New Portfolio Beta = 1.0175

Portfoli o' s Required Return=r RF + ( b ) ( R PM )

Portfoli o' s Required Return=5 % + ( 1.0175 ) ¿)

Portfoli o' s Required Return=5 % +6.105

Portfoli o' s Required Return=11.10 5

Portfoli o' s Required Return=11.1 1