Suppose you are the money manager of a $3.65 million investment fund. The fund c

Question

Suppose you are the money manager of a $3.65 million investment fund. The fund consists of four stocks with the following investments and betas:

If the market's required rate of return is 13% and the risk-free rate is 4%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Stock Investment Beta A $   240,000                                 1.50 B 420,000                                 (0.50) C 940,000                                 1.25 D 2,050,000                                 0.75

Explanation / Answer

Calculate the portfolio beta.

Portfolio beta is the weighted average of individual betas

Portfolio beta = (240000/3650000)*1.5 + (420000/3650000)*-0.5 + (940000/3650000)*1.25 + (2050000/3650000)*0.75 = 0.7842

According to CAPM,

Required rate = Risk free rate + beta*(Market return - risk free rate)

= 4% + 0.7842*(13%-4%) = 11.06%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.