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	$   460,000	1.50
B	300,000	(0.50)
C	1,500,000	1.25
D	1,800,000	0.75

If the market's required rate of return is 13% and the risk-free rate is 7%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Stock	Investment ($)	Working of weights	Weights (W)	Beta	W*Beta
A	460000	460000/4060000	0.1133	1.5	0.1700
B	300000	300000/4060000	0.0739	-0.5	-0.0369
C	1500000	1500000/4060000	0.3695	1.25	0.4618
D	1800000	1800000/4060000	0.4433	0.75	0.3325
Total	4060000				0.9273
We know,
Portfolio beta= Weighted average
	0.9273	(See table)
Given,
Market return (Rm)= 13%
Risk free rate (Rf)= 7%
As per CAPM,
Required return= Rf+(Rm-Rf)*Beta
	7+(13-7)*0.9273
	12.5638%
Required rate of return of fund= 12.56%