Question

PORTFOLIO REQUIRED RETURN

Suppose you are the money manager of a $4.96 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment	Beta
A	$   400,000	1.50
B	500,000	(0.50)
C	1,260,000	1.25
D	2,800,000	0.75

If the market's required rate of return is 11% and the risk-free rate is 3%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

%

Answer 1

Total Portfolio value = Value of A + Value of B + Value of C + Value of D

=400000+500000+1260000+2800000

=4960000

Weight of A = Value of A/Total Portfolio Value

= 400000/4960000

=0.0806

Weight of B = Value of B/Total Portfolio Value

= 500000/4960000

=0.1008

Weight of C = Value of C/Total Portfolio Value

= 1260000/4960000

=0.254

Weight of D = Value of D/Total Portfolio Value

= 2800000/4960000

=0.5645

Beta of Portfolio = Weight of A*Beta of A+Weight of B*Beta of B+Weight of C*Beta of C+Weight of D*Beta of D

Beta of Portfolio = 1.5*0.0806+-0.5*0.1008+1.25*0.254+0.75*0.5645

Beta of Portfolio = 0.8115

As per CAPM

expected return = risk-free rate + beta * (expected return on the market - risk-free rate)

Expected return% = 3 + 0.8115 * (11 - 3)

Fund Expected return% = 9.49