Suppose you are the money manager of a $4.3 million investment fund. The fund co

Question

Suppose you are the money manager of a $4.3 million investment fund. The fund consists of 4 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? Round your answer to two decimal places.
%

Stock Investment Beta A $   320,000                                 1.50 B 520,000                                 - 0.50 C 1,260,000                                 1.25 D 2,200,000                                 0.75

Explanation / Answer

The weighted avg beta of the portfolio is -
400,000 x 1.5 = 600,000
600,000 x (.50) = (300,000)
1,000,000 x 1.25 = 1,250,000
2,000,000 x .75 = 1,500,000

Total Investment 4,000,000 Total beta 3,050,000 Weghted Avg Beta = .7625

Required Rate = RF + Beta(Market risk premium)
RR = 6% + .7625(14% - 6%) = 6% + .7625(8%) = 6% + 6.1% = 12.1%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.