PORTFOLIO REQUIRED RETURN Suppose you are the money manager of a $4.58 million i

Question

PORTFOLIO REQUIRED RETURN

Suppose you are the money manager of a $4.58 million investment fund. The fund consists of four stocks with the following investments and betas:

If the market's required rate of return is 13% and the risk-free rate is 7%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

%

Stock Investment Beta A $   200,000                                 1.50 B 440,000                                 (0.50) C 1,340,000                                 1.25 D 2,600,000                                 0.75

Explanation / Answer

Portfolio beta=Respective betas*Respecitve investment weights

=(200,000/4,580,000*1.5)+(440,000/4,580,000*-0.5)+(1,340,000/4,580,000*1.25)+(2,600,000/4,580,000*0.75)

=0.809(Approx)

Hence required return=Risk free rate+Beta*(MArket rate-Risk free rate)

=7+0.809*(13-7)

=11.85%(Approx)

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