1. Calculate the required rate of return for Climax Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 6.0%, (4) the firm has a beta of 1.2, and (5) its realized rate of return has averaged 16.0% over the last 5 years. Show work.
a. 15.19% b. 13.83% c. 11.40% d. 14.20%
2. You have been managing a $5million portfolio that has a beta of 1.25 and a required rate of return of 12%. The current risk-free rate is 5.25%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 0.75, what will be the required return on your $5.5 million portfolio? Show work.
a. 10.43% b. 11.75% c. 9.62% d. 10.17%