Question

Portfolio Required Return Suppose you manage a $3.955 million fund that consists of four stocks with the following investments: Stock Investment Beta A $260,000 1.50 B 425,000 -0.50 C 1,420,000 1.25 D 1,850,000 0.75 If the market's required rate of return is 13% and the risk-free rate is 4%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Answer:

Investment in Stock A = $260,000
Investment in Stock B = $425,000
Investment in Stock C = $1,420,000
Investment in Stock D = $1,850,000

Weight of Stock A = $260,000 / $3,955,000
Weight of Stock A = 0.0657

Weight of Stock B = $425,000 / $3,955,000
Weight of Stock B = 0.1075

Weight of Stock C = $1,420,000 / $3,955,000
Weight of Stock C = 0.3590

Weight of Stock D = $1,850,000 / $3,955,000
Weight of Stock D = 0.4678

Fund Beta = (0.0657 * 1.50) + (0.1075 * -0.50) + (0.3590 * 1.25) + (0.4678 * 0.75)
Fund Beta = 0.84

Required rate of return = Risk Free Rate + Beta * (Market Return – Risk Free Rate)
Required rate of return = 4% + 0.84 * (13% - 4%)
Required rate of return = 4% + 7.56%
Required rate of return = 11.56%