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)

What is the discount rate?

Would a beta of 1.1 increase her returns?

Explanation / Answer

Discount rate = Risk free rate + beta * (Market return - Risk free rate)

= 2% + 0.8 * (13% - 2%)

= 10.8%

No, beta of 1.1 would only increase the discount rate i.e. the required rate of return from the fund. The average of the fund would continue to be 8.5%.

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