CAPM and required return HR Industries (HRI) has a beta of 1.8, while LR Industries’
(LRI) beta is 0.6. The risk-free rate is 6 percent, and the required rate of return on an
average stock is 13 percent. Now the expected rate of inflation built into rRF falls by 1.5
percentage points, the real risk-free rate remains constant, the required return on the
market falls to 10.5 percent, and all betas remain constant. After all of these changes,
what will be the difference in the required returns for HRI and LRI?
8-16 CAPM and portfolio return You have been managing a $5 million portfolio that has a
beta of 1.25 and a required rate of return of 12 percent. The current risk-free rate is 5.25
percent. 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?
8-17 Portfolio beta A mutual fund manager has a $20,000,000 portfolio with a beta of 1.5. The
risk-free rate is 4.5 percent and the market risk premium is 5.5 percent. The manager
expects to receive an additional $5,000,000, which she plans to invest in a number of
stocks. After investing the additional funds, she wants the fund’s required return to be
13 percent. What should be the average beta of the new stocks added to the portfolio?