Question

A mutual fund manager expects her portfolio to earn a rate of return of 14% this year. The beta of her portfolio is 0.9. The rate of return available on risk-free assets is 6% and you expect the rate of return on the market portfolio to be 16%. What expected rate of return would you demand before you would be willing to invest in this mutual fund? (Do not round intermediate calculations. Enter your answer as a whole percent.)

Answer 1

• According to SHARPE the return on individual stock or a portfolio of stocks , should Equal it’s cost of capital. However, the formula for calculation remains the same that is CAPM ( capital assets pricing model)
• R_r =R_f + (R_m-Rf)

Where, R_r= required rate of return

R_f= risk free rate of return

R_m=market rate of return

= beta coefficient

• ​​ Now as per the CAPM

   R_r= R_f + (R_m-Rf) = 6% + 0.9(16%-6%) = 0.06+0.9(0.10)=0.06+0.09=0.15=15%

Therefore ,minimum required rate of return must be at least 15%.