Question

Suppose you are the money manager of a $4.52 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment		Beta
A	$   360,000		1.50
B	700,000		(0.50)
C	1,060,000		1.25
D	2,400,000		0.75

If the market's required rate of return is 8% 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

Weight of stock A = 360,000 / 4,520,000 = 0.0796

Weight of stock B = 700,000 / 4,520,000 = 0.1549

Weight of stock C = 1,060,000 / 4,520,000 = 0.2345

Weight of stock D = 2,400,000/ 4,520,000 = 0.5310

Beta = weight × beta of stock

= 0.0796 × 1.50 + 0.1549 × -0.50 + 0.2345 × 1.25 + 0.5310 × 0.75

= 0.1194 - 0.0775 + 0.2931 + 0.3982

= 0.7332

Required rate of return of fund = risk free rate + beta × (market return- risk free rate)

= 3% + 0.7332 (8% - 3%)

= 3% + 0.7332 (5%)

= 3% + 3.67%

= 6.67%