Henry, a direct descendant of Jefferson Morgan has inherited $450,000. A financi

Question

Henry, a direct descendant of Jefferson Morgan has inherited $450,000. A financial advisor tells her to invest this amount and target an average of at least 8% return over a 30 years. Henry decides to invest in a Northern Endowment Fund that has had a ten year average return of 8.5%. During the same time, S&P500 has had a 13% return (this is market return). The risk free return is 2% and the beta of the fund is 0.8. (15 PTS)

A. What is the discount rate?

B. Would a beta of 1.1 increase her returns?

Explanation / Answer

Return of Henry Risk Free rate Rf= 2% Market return=Rm= 13% Beta of fund                         0.80 Required return of Fund =Rf +Beta*Rm =0.02+0.80*0.13 = 12.40% A, So the discount rate of fund =12.4% B, If Beta =1.10 Required return =0.02+1.1*0.12                                          = 15.20% so the required rate or discount rate   will increase

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