Question

Joel Foster is the portfolio manager of the Go Anywhere Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 8.75% and the risk-free rate is 2.50%. What rate of return should investors expect (and require) on this fund? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

Stock	Amount	Beta
A	$1,075,000	1.20
B	675,000	1.50
C	750,000	3.15
D	500,000	1.10
	$3,000,000

Answer 1

The rate of return is computed as shown below:

= risk free rate + beta x (return on market - risk free rate)

beta is computed as follows:

= Beta of stock A x weight of stock A + Beta of stock B x weight of stock B + Beta of stock C x weight of stock C + Beta of stock D x weight of stock D

= 1.20 x $ 1,075,000 / $ 3,000,000 + 1.50 x $ 675,000 / $ 3,000,000 + 3.15 x $ 750,000 / $ 3,000,000 + 1.10 x $ 500,000 / $ 3,000,000

= 0.43 + 0.3375 + 0.7875 + 0.18333333

= 1.738333333

So, the required rate of return will be computed as follows:

= 0.025 + 1.738333333 x (0.0875 - 0.025)

= 13.36% Approximately

Feel free to ask in case of any query relating to this question