Question

Kaiser is the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect (and require) on this fund?

Stock	Amount	Beta
A	$1,075,000	1.20
B	675,000	0.50
C	750,000	1.40
D	500,000	0.75
	$3,000,000

*Show your formulas and formula inputs

Answer 1

First we will calculate beta of Portfolio.

Beta of Portfolio Formula = sum of (value or weight of each stock * stock beta)/total value or weight

=((1075000*1.20)+(675000*0.50)+(750000*1.40)+(500000*0.75))/3000000

=1.0175

Beta of Portfolio = 1.0175

Risk Free rate =5%

Market Return = 11%

Required or Expected rate of return of Portfolio = Riskfree rate +(beta*(Market Return - Riskfree rate))

=5%+(1.0175*(11%-5%))

=0.11105 or 11.105%

So required return of Portfolio is 11.105%