Question

Suppose you are the money manager of a $4.02 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment		Beta
A	$   460,000		1.50
B	300,000		(0.50	)
C	1,560,000		1.25
D	1,700,000		0.75

If the market's required rate of return is 8% and the risk-free rate is 5%, 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

=(460,000/4,020,000*1.5)+(300,000/4,020,000*-0.5)+(1,560,000/4,020,000*1.25)+(1,700,000/4,020,000*0.75)

=0.936567164

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

=5+0.936567164*(8-5)

=7.81%(Approx).