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

Hi,

Please find the answer as follows:

Step 1:

Portfolio Beta = 1.5*320000/4300000 -.50*520000/4300000 + 1.25*1260000/4300000 + .75*2200000/4300000 = .801 or .80

Step 2:

Required Rate of Return = Rf + b*(Rm - Rf) = 5 + .80*(12 - 5) = 10.61%

Answer is 10.61%

Thanks.

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