A mutual fund manager expects her portfolio to earn a rate of return of 8% this

Question

A mutual fund manager expects her portfolio to earn a rate of return of 8% this year. The beta of her portfolio is .8. Assume rate of return available on risk-free assets is 5% and you expect the rate of return on the market portfolio to be 10%.

b) Should you invest in this mutual fund?

A mutual fund manager expects her portfolio to earn a rate of return of 8% this year. The beta of her portfolio is .8. Assume rate of return available on risk-free assets is 5% and you expect the rate of return on the market portfolio to be 10%.

a) Calaculate the expected rate of return that investors will demand of the portfolio

b) Should you invest in this mutual fund?

Explanation / Answer

Expected return = Rf+×Rp

Rf is risk free return

Rp is risk premium

= 5%+0.8×(8%-5%)

= 7.4%

CAPM return is less than her expected return.

Should not be invested.

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