No idea how to solve this help please! What is the required rate of return on Investment L?

What is the required rate of return on Investment M?

Portfolio Risk - If the investor is an individual, the investments are individual securities (stocks), the portfolio is the market portfolio, and the relevant risk of each asset is called market risk. - If the investor is a business, the investments are real assets (projects), the portfolio is the entire business, and the relevant risk of each asset is called corporate risk. Portfolio Betas The beta of a portfolio is simply the weighted average of the betas of the component investments. This concept applies regardless of whether the portfolio is an individual investor's stock portfolio or a business's portfolio of projects. For example, combining H and L from the above images: p=(0.70bH)+(0.30bL)=(0.701.5)+(0.300.5)=1.20 Risk and Required Return Consider the following images regarding risk and required return: - Defining and measuring risk is of no value if we cannot relate risk to required rate of return. - The relationship between risk and required rate of return on a stock investment is given by the Security Market Line (SML) of the Capital Asset Pricing Model (CAPM): R(Re)=RF+[R(RM)RF] Market Premium Risk - Assume RF =6%. - Assume R(RM)=10%. - =1.5. R(Re)=RF+[R(RM)RF]=6%+(10%6%)1.5=6%+(4%1.5)=6%+6.0%=12.0%. Comment below: What is the required rate of return on Investment L ? What is the required rate of return on Investment M ? Note that the term [R(RM)RF] is called the market risk premium. It is the amount above the risk-free rate that investors require to assume average (=1) risk. Beta Illustration Rate of Return if State Occurs If beta =1.0, investment has average risk, where average is defined as the riskiness of the portfolio If beta >1.0, investment has above-average risk If beta 1.0, investment has above-average risk If beta