Suppose you are the money manager of a $5.05 million investment fund. The fund c

Question

Suppose you are the money manager of a $5.05 million investment fund. The fund consists of four stocks with the following investments and betas:

If the market's required rate of return is 9% and the risk-free rate is 6%, 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 $   420,000                                 1.50 B 680,000                                 (0.50) C 1,300,000                                 1.25 D 2,650,000                                 0.75

Explanation / Answer

The  fund's required rate of return = risk-free rate + ( market's required rate of return -risk-free rate ) * Portfolio Beta

= 6% + ( 9% - 6%) * 0.77277277

= 8.32%

Hence the correct answer is 8.32%

Note :Portfolio Beta =

Stock Investment Beta Weight ( Respective Value / Total Value) Weight * Beta A 4,20,000 1.5 0.083168317 0.124752475 B 6,80,000 -0.5 0.134653465 -0.067326733 C 13,00,000 1.25 0.257425743 0.321782178 D 26,50,000 0.75 0.524752475 0.393564356 50,50,000 Portfolio Beta 0.772772277

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