ABC Company holds a well-diversified portfolio in the amount of
$90,000 that has an expected return of 11.0% and a beta of 1.22. It
is buying 1,000 shares of DEF Company stock at $10 a share and
adding them to its portfolio. DEF Company has an expected return of
13.0% and a beta of 1.38. Currently, the risk free rate is 3.5%,
and the stock market return is 8.2%. What will the required rate of
return on the new portfolio be after the purchase of DEF stock?
(Hint: Compute a new portfolio beta first and then use the
CAPM.)
ABC Company holds a well-diversified portfolio in the amount of $90,000 that has an expected return of 11.0% and a beta
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