ORTFOLIO REQUIRED RETURN Suppose you are the money manager of a $3.76 million in

Question

ORTFOLIO REQUIRED RETURN

Suppose you are the money manager of a $3.76 million investment fund. The fund consists of four stocks with the following investments and betas:

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.

%

Stock Investment Beta A $   500,000                                 1.50 B 520,000                                 (0.50) C 940,000                                 1.25 D 1,800,000                                 0.75

Explanation / Answer

Portfolio beta=Respective betas*Respective weights

=(500,000/3,760,000*1.5)+(520000/3,760,000*-0.5)+(940000/3,760,000*1.25)+(1800000/3,760,000*0.75)

which is equal to

=0.801861702

required return= risk-free rate +Beta*(MArket rate- risk-free rate )

=3+0.801861702*(8-3)

which is equal to

=7.01%(Approx).

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