Suppose you are the money manager of a $4.09 million investment fund. The fund c

ID: 2810934 • Letter: S

Question

Suppose you are the money manager of a $4.09 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock

If the market's required rate of return is 13% and the risk-free rate is 4%, 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 $ 340,000 1.50 B 360,000 (0.50) C 1,340,000 1.25 D 2,050,000 0.75

Explanation / Answer

To calculate required rate we need to calculate first beta of the portfolio

Stock

Investment

Beta

% of stock in portfolio

Beta * % of stock

340000

1.5

0.08

0.12

360000

-0.5

0.09

-0.04

1340000

1.25

0.33

0.41

2050000

0.75

0.50

0.38

Total

0.87

So beta of the portfolio comes to be 0.87

Capital asset pricing is used to calculate required rate of return

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

Where,

Risk free rate of return = 4%

Beta = 0.87

Market return = 13%

Let's put all the values in the formula

Required rate of return = 0.04 + 0.87 *(0.13 - 0.04)

= 0.04 + 0.87 *(0.09)

= 0.04 + 0.0783

= 0.1183

So the required rate of return is 11.83%