Suppose you are the money manager of a $5.03 million investment fund. The fund c

Question

Suppose you are the money manager of a $5.03 million investment fund. The fund consists of 4 stocks with the following investments and betas:

Stock A: $420,000 (investment), 1.50(Beta)
Stock B: $680,000 (Investment), -0.50 (Beta)
Stock C: $1,180,000 (investment), 1.25 (Beta)
Stock D: $2,750,000 (investment), 0.75 (Beta)


A) If the market's required rate of return is 13% and the risk-free rate is 7%, what is the fund's required rate of return? (ROUND YOUR ANSWER TO TWO DECIMAL PLACES)


*please show how to derive answer, thanks!

Explanation / Answer

r(m) = r(f) + b * r(p)
r(m) = market rate = 13 %
r(f) = risk free rate = 7%
r(p) = risk premium in %
b = beta = 1 (for market)
So, r(p) = 13 - 7 = 6%

Beta of portfolio, b(P)
= (0.42*1.50+0.68*(-0.5)+1.18*1.25+2.75*0.75)/5.03
= 0.761 approx.

Fund's required rate of return, r
= r(f) + b(P) * r(p)
= 7 + 0.761 * 6
= 11.566 % = SAY 11.57 % (ANSWER)

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