Question

Blackrock is a $3 billion hedge fund that contains the stocks listed below. Assume that the required rate of return on the market is 11 percent and the risk-free rate is 5 percent. 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

Answer 1

Rate of Return = Risk Free Rate + ( Rate of Return on Market - Risk Free Rate) * Portfolio Beta

= 5% + ( 11% - 5 %) * 1.01750

= 11.105%

Hence the correct answer is 11.105%

Note:

1. Computation of the Portfolio Beta

Stock	Amount	Beta	Weights ( Amount / 3000000)	Weights * Beta
A	1075000	1.2	0.358333333333	0.4300
B	675000	0.5	0.2250	0.1125
C	750000	1.4	0.2500	0.3500
D	500000	0.75	0.166666666667	0.1250
	3000000	Portfolio Beta ( Sum of Weights * Beta)		1.01750