Question

Consider the following information and then calculate the required rate of return for the Scientific investment...

Consider the following information and then calculate the required rate of return for the Scientific investment fund. The funds assets are as follows:

Stock Investment Beta
A $200,000 1.5
B 300,000 -0.5
C 500,000 1.25
D 1,000,000 0.75

The market risk premium is 8% and the risk free rate is 7 percent.

Homework Answers

Answer #1
Using CAPM model,
Er= Rf+ (Rm-Rf)*B
Where,
Er= Expected return from the portfolio
Rf= Risk free return
Rm= Market return
Rm- Rf= Market risk premium
B= Weighted average Beta of the portfolio
Weighted average B = (($200000*1.5)+($300000*(-0.5))+($500000*1.25)+($1000000*0.75))/$2000000
=0.7625 times
Er= 7+8*0.7625
     = 13.1%
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