PORTFOLIO REQUIRED RETURN Suppose you are the money manager of a $4.02 million i

Question

PORTFOLIO REQUIRED RETURN

Suppose you are the money manager of a $4.02 million investment fund. The fund consists of four stocks with the following investments and betas:

If the market's required rate of return is 11% 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 $4.02 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock Investment Beta A $   280,000                                 1.50 B 800,000                                 (0.50) C 1,140,000                                 1.25 D 1,800,000                                 0.75

If the market's required rate of return is 11% 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

=(280,000/4,020,000*1.5)+(800,000/4,020,000*(0.5))+(1,140,000/4,020,000*1.25)+(1,800,000/4,020,000*0.75)

=0.695(Approx)

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

=5+0.695*(11-5)

=9.17%(Approx).

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