PORTFOLIO REQUIRED RETURN Suppose you are the money manager of a $3.89 million i

Question

PORTFOLIO REQUIRED RETURN

Suppose you are the money manager of a $3.89 million investment fund. The fund consists of four stocks with the following investments and betas:

If the market's required rate of return is 8% and the risk-free rate is 5%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Problem Walk-Through

PORTFOLIO REQUIRED RETURN

Suppose you are the money manager of a $3.89 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock Investment Beta A $   280,000                                 1.50 B 300,000                                 (0.50) C 1,260,000                                 1.25 D 2,050,000                                 0.75

If the market's required rate of return is 8% and the risk-free rate is 5%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Explanation / Answer

Portfolio beta=Respective betas*Respective investment weights

=(280,000/3,890,000*1.5)+(300,000/3,890,000*-0.5)+(1,260,000/3,890,000*1.25)+(2,050,000/3,890,000*0.75)

=0.869(Approx)

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

=5+0.869*(8-5)

=7.61%(Approx).

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