Question

Suppose you are the money manager of a $4.88 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment		Beta
A	$   240,000		1.50
B	700,000		(0.50	)
C	1,240,000		1.25
D	2,700,000		0.75

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? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Portfolio beta=Respective beta*Respective weight

=(240,000/4,880,000*1.5)+(700,000/4,880,000*-0.5)+(1,240,000/4,880,000*1.25)+(2,700,000/4,880,000*0.75)

=0.734631147

Required return=risk free rate+beta*(market rate-risk free rate)

=6+0.734631147*(12-6)

=10.41%(Approx).