Suppose you mange a $4 million fund that consists of four stocks with the follow

Question

Suppose you mange a $4 million fund that consists of four stocks with the following investments

Stock                          Investment                        Beta

A                                    $400,000                         1.50

B                                      600,000                         -0.50

C                                     1,000,000                       1.25

D                                     2,000,000                       0.75

If the market's required rate of return is 14% and the risk-free rate is 6%, what is the funds required rate of return.  

Explanation / Answer

beta of portfolio =

[(400,000 *1.50) + ( 600,000* -0.50) + ( 1,000,000* 1.25)+(2,000,000*0.75)]/4,000,000

= 0.7625

required rate of return. = risk-free rate + ( market's required rate of return - risk-free rate)*beta

= 6 +(8*0.7625 ) = 12.1 %

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