Consider the following information and then calculate the required rate of retur

Question

Consider the following information and then calculate the required rate of return for the Global Equity Fund, which includes 4 stocks in the portfolio. The market's required rate of return is 10.00%, the risk-free rate is 7.25%, and the Fund's assets are as follows: Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72. Stock Investment Beta A $185,000 1.35 B $365,000 0.85 C $535,000 –0.45 D $1,145,000 2.08 8.68% 9.42% 11.96% 10.58% 12.27%

Explanation / Answer

Required rate of return for the Global equity fund = 10.58 %

Required rate of return = Rf + Beta * ( Rm - Rf )

= 7.25 + 1.211143 * ( 10 - 7.25 )

= 7.25 + 3.33 = 10.58 %

Workings :  Calculation of Beta of the fund

In the above statement W = weight of the stock in fund. This is simple to calculate. Just divide individual investment with total investment. Example for A = 185000 / 2230000 = 0.08296

Stock Inv Beta W    W * Beta A 185000 1.35 0.08296 0.111996 B 365000 0.85 0.163677 0.139126 C 535000 -0.45 0.23991 -0.10796 D 1145000 2.08 0.513453 1.067982 2230000 Beta 1.211143

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