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	$   240,000	1.50
B	440,000	(0.50)
C	1,300,000	1.25
D	2,350,000	0.75

If the market's required rate of return is 13% and the risk-free rate is 5%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places

Answer 1

Portfolio Beta = Weight of Stock A * Beta of Stock A + Weight of Stock B * Beta of Stock B + Weight of Stock C * Beta of Stock C + Weight of Stock D * Beta of Stock D + Weight of Stock E * Beta of Stock E
Portfolio Beta = 0.0554 * 1.50 + 0.1016 * (-0.50) + 0.3002 * 1.25 + 0.5428 * 0.75
Portfolio Beta = 0.815

Portfolio Required Return = Risk-free Rate + Portfolio Beta * (Market Return - Risk-free Rate)
Portfolio Required Return = 5.00% + 0.815 * (13.00% - 5.00%)
Portfolio Required Return = 11.52%