Consider the following information and then calculate the required rate of retur

Question

Consider the following information and then calculate the required rate of return for the Scientific Investment Fund. The funds' assets are as follows:

Stock      Investment               Beta

A               $200,000                1.50

B                $300,000                -0.50

C                $500,000                 1.25

D                $1,000,000              0.75

The market required rate of return is 15 percent and the risk-free rate is 7 percent.

Calculate the required rate of return for the Scientific Investment Fund. PLEASE SHOW ALL WORK THANKS!!!!

Explanation / Answer

the fund beta is computed as folows

total investment = 200000 + 300000 + 500000 + 1000000 = 2000000

beta = (200000/2000000) * 1.5 + (300000/2000000) * -0.5 + (500000/2000000) * 1.25 + (1000000/2000000) * 0.75 = 0.7625

required rate of retun = rf + (rm - rf) * beta

= 7% + (15% - 7%) * 0.7625

=13.1%

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