Question

Suppose you are the money manager of a $4.33 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment	Beta
A	$   420,000	1.50
B	740,000	(0.50)
C	1,020,000	1.25
D	2,150,000	0.75

If the market's required rate of return is 13% and the risk-free rate is 6%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

%

Answer 1

Fund's required rate of return = Risk Free Rate + ( market's required rate of return - Risk Free rate) * Portfolio Beta

= 6 % + ( 13% - 6 %) * 0.726905311778291

= 11.088337182448 %

Hence the correct answer is 11.09%

Notes:

1. Calculation of the Portfolio Beta

Stock	Investment	Respective Beta	Respective Investment Weight (Respective  Investment / Total Value)	Respective Beta * Respective Investment Weight
A	4,20,000	1.5	0.0969976905311778	0.1454965357967670
B	7,40,000	-0.5	0.1709006928406470	-0.0854503464203233
C	10,20,000	1.25	0.2355658198614320	0.2944572748267900
D	21,50,000	0.75	0.4965357967667440	0.3724018475750580
Total Value	43,30,000			0.7269053117782910

Beta of the Portfolio = Sum of (Respective Beta * Respective Investment Weight)

= 0.145496535796767 -0.0854503464203233 + 0.29445727482679 + 0.372401847575058

= 0.726905311778291