Question

Suppose you are the money manager of a $4.06 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment		Beta
A	$   280,000		1.50
B	500,000		(0.50	)
C	1,580,000		1.25
D	1,700,000		0.75

If the market's required rate of return is 8% 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

Solution:-

First to calculate Portfolio Beta-

Portfolio Beta is weighted Average Beta.

Portfolio Beta =

Portfolio Beta = 0.1034 - 0.0616 + 0.4865 + 0.3140

Portfolio Beta = 0.8424

To Calculate  fund's required rate of return-

Required rate of return = Risk Free Rate + Portfolio Beta * (Market Return - Risk Free Return)

Required rate of return = 0.04 + 0.8424 * (0.08 - 0.04)

Required rate of return = 7.37%

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