Suppose you are the money manager of a $4.48 million investment fund. The fund c

Question

Suppose you are the money manager of a $4.48 million investment fund. The fund consists of 4 stocks with the following investments and betas:

If the market's required rate of return is 12% and the risk-free rate is 6%, what is the fund's required rate of return? Round your answer to two decimal places.

Stock Investment Beta A $   240,000                                 1.50 B 760,000                                 - 0.50 C 1,380,000                                 1.25 D 2,100,000                                 0.75

Explanation / Answer

Portfolio beta=Respective betas*Respective investment weights

=(240,000/4,480,000*1.5)+(760000/4,480,000*-0.5)+(1380000/4,480,000*1.25)+(2100000/4,480,000*0.75)

=0.732142857

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

=6+0.732142857*(12-6)

=10.39%(Approx).

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