A mutual fund manager expects her portfolio to earn a rate of return of 13% this

Question

A mutual fund manager expects her portfolio to earn a rate of return of 13% this year. The beta of her portfolio is .5. The rate of return available on risk-free assets is 7% and you expect the rate of return on the market portfolio to be 17% What expected rate of return would you demand before you would be willing to invest in this mutual fund? (Do not round intermedlate calculations. Enter your anewer as a whole percent.) Expected rate of return Is this fund attractive to you? O No O Yes References eBook & Resources Worksheet

Explanation / Answer

a. Expected rate of return 12% Working; As per Capital Asset Pricing Model, Expected rate of return = Risk free rate+Beta*(return on market portfolio-risk free rate) = 7% + 0.5 x (17%-7%) = 12% b. Yes Working: Expected rate of return is the minimum return an investor expects from the investments. So, in this case as investor's minimum required return is 12% and fund manager expects to earn a rate of return of 13%, this is an attractive fund.

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