Question

Consider the following information and then calculate the required rate of return for the Scientific Investment Fund, which holds 4 stocks. The market's required rate of return is 15 %, the risk-free rate is 7 %, and the Fund's assets are as follows:

Stock Investment Beta:

A $ 200,000 1.50

B 300,000 -0.50

C 500,000 1.25

D 1,000,000 0.9

Answer 1

Step-1, Calculation of Overall Beta of the Portfolio

Stocks	Amount Invested ($)	Weight to the Total Value	Beta of the stock	Overall Beta
A	2,00,000	0.1000	1.50	0.1500
B	3,00,000	0.1500	-0.50	-0.0750
C	5,00,000	0.2500	1.25	0.3125
D	10,00,000	0.5000	0.90	0.4500
TOTAL	20,00,000	1.0000		0.8375

Step-2, Portfolio’s Required rate of Return

Portfolio’s Required rate of Return = Rf + Beta[Rm – Rf]

= 7% + 0.8375[15% - 7%]

= 7% + [0.8375 x 8%]

= 7% + 6.70%

= 13.70%

“Therefore, the required rate of return for the Scientific Investment Fund = 13.70%”