PORTFOLIO REQUIRED RETURN Suppose you are the money manager of a $4.96 million i

Question

PORTFOLIO REQUIRED RETURN

Suppose you are the money manager of a $4.96 million investment fund. The fund consists of four stocks with the following investments and betas:

If the market's required rate of return is 12% and the risk-free rate is 5%, 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 $   480,000                                 1.50 B 600,000                                 (0.50) C 1,180,000                                 1.25 D 2,700,000                                 0.75

Explanation / Answer

Portfolio beta=Respective betas*Respective weights

=(480,000/4,960,000*1.5)+(600,000/4,960,000*-0.5)+(1,180,000/4,960,000*1.25)+(2,700,000/4,960,000*0.75)

=0.79032258

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

=5+0.79032258*(12-5)

=10.53%(Approx).

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