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e. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is 5%. What is the expected return on the
e. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is 5%. What is the expected return on the market? Now use the SML equation to calculate the two companies' required returns. Market risk premium (RPM) = Risk-free rate = 5.000% 6.040% Expected return on market = Risk-free rate 6.040% 11.040% + + Market risk premium 5.000% II II Required return Goodman: Required return = 1 Landry: Required return If you formed a portfolio that consisted of 50% Goodman stock and 50% Landry stock, what vould be its beta and its required return? he beta of a portfolio is simply a weighted average of the betas of the stocks in the portfolio, so this portfolio's beta would be: Fortfolio beta = . Suppose an investor wants to include Goodman Industries' stock in his or her portfolio. Stocks , B, and C are currently in the portfolio, and their betas are 0.769, 0.985, and 1.423, respectively. alculate the new portfolio's required return if it consists of 25% of Goodman, 15% of Stock A, 40% f Stock B, and 20% of Stock C. Beta Goodman Stock A Stock B Stock C 0.769 0.985 1.423 Portfolio Weight 25% 15% 40% 20% 100% Portfolio Beta * equired return on portfolio: Risk-free rate Market Risk Premiur Beta =
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