Question

Joel Foster is the portfolio manager of the SF Fund, a $3.05 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. 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	800,000	1.40
D	500,000	0.75
	3,050,000

Select the correct answer.

a. 11.07%

b. 11.21%

c. 11.14%

d. 11.28%

e. 11.35%

Answer 1

The rate of return is computed as shown below:

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

beta is computed as follows:

= beta of stock A x weight of stock A + beta of stock B x weight of stock B + beta of stock C x weight of stock C + beta of stock D x weight of stock D

= 1.20 x $ 1,075,000 / $ 3,050,000 + 0.50 x $ 675,000 / $ 3,050,000 + 1.40 x $ 800,000 / $ 3,050,000 + 0.75 x $ 500,000 / $ 3,050,000

= 1.023770492

So, the return is computed as follows:

= 0.05 + 1.023770492 ( 0.11 - 0.05)

= 11.14% Approximately

So, the correct answer is option c.

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