Assuming an equally weighted portfolio including the following three stocks (MRK

Question

Assuming an equally weighted portfolio including the following three stocks (MRK, GOOG and HOG), what should one’s required return be for this portfolio using the Capital Asset Pricing Model? Merck & Co. (MRK)- Beta= 0.50 Google Inc. (GOOG)- Beta= 1.14 Harley Davidson (HOG)- Beta= 1.73 Note: the 10 year Treasury bond yield is 2.71% (proxy for nominal risk-free rate) and the average return on the market, as measured by the S&P500 is 12.11%. Select one: a. 13.27% b. 8.95% c. 2.71% d. 9.24% e. 5.30%

Explanation / Answer

Risk Free Rate = 2.71%

Market Rate = 12.11%

MRL Expected Return = 2.71% + .50 (12.11% - 2.71%) = 7.41%

GOOG Expected Return = 2.71% + 1.14 (12.11% - 2.71%) = 13.43%

HOG Expected Return = 2.71% + 1.73 (12.11% - 2.71%)  = 18.97%

Portfolio Required Return = 7.41% * 1/3 + 13.43% * 1/3 + 18.97% * 1/3 = 2.47% + 4.48% + 6.32% = 13.27%

Option a is correct

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