Suppose you are the manager of a $10,000,000 investment fund. The fund consists

Question

Suppose you are the manager of a $10,000,000 investment fund.

The fund consists of 4 stocks with the following investments and beta coefficients:

Stock A $3,000,000 beta 1.5

Stock B $2,000,000 beta 1.0

Stock C $4,000,000 beta 0.5

Stock D $1,000,000 beta 2.0

If the market’s required rate of return (rm) is 13% and the risk-free rate( rRF) is 6%, what is the funds required rate of return, r?

You must first find the beta for the portfolio. Then use it to calculate the required rate of return using the SML equation.

**Please Show work, because I have no idea what I'm doing.

Explanation / Answer

caluclate weighte average beta and it is

=[(3000000/10000000)*1.5]+[(2000000/10000000)*1]+[(4000000/10000000)*0.5]+[(1000000/10000000)*2]

=1.05

Required return=Rf+beta*(Rm-Rf)

=6+1.05*(13-6)=13.35%

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