Question

Portfolio required return

Suppose you are the money manager of a $4.53 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment	Beta
A	$   480,000	1.50
B	740,000	- 0.50
C	1,060,000	1.25
D	2,250,000	0.75

If the market's required rate of return is 13% and the risk-free rate is 6%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

%

Answer 1

Ans 11.20%

Stock	Beta	Investment	Beta* Investment
A	1.50	480000	720000
B	-0.50	740000	-370000
C	1.25	1060000	1325000
D	0.75	2250000	1687500
	Total	4530000	3362500
Average Beta =	(Beta * Investment) / Total Investment
	3362500 / 4530000
	0.74227

Required Return =	Risk free Return + (Market Return - Risk free return)* Beta
Required Return =	6% + (13% - 6%)*0.74227
Required Return =	11.20%