Question

Suppose you are the money manager of a $4.16 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment		Beta
A	$   380,000		1.50
B	400,000		(0.50	)
C	1,480,000		1.25
D	1,900,000		0.75

If the market's required rate of return is 9% 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

Stock	Investment ($)	Beta	Calculation of weights	Weights
A	380000	1.50	380000/4160000	0.09
B	400000	-0.50	400000/4160000	0.10
C	1480000	1.25	1480000/4160000	0.36
D	1900000	0.75	1900000/4160000	0.46
Total	4160000
We know,
Beta of portfolio= Weighted average
	(0.09*1.50)+(0.10*-0.5)+(0.36*1.25)+(0.46*0.75)
	0.88
Given,
Return from market (Rm)	9%
Risk free rate (Rf)	5%
We know,
As per CAPM,
Required rate of return= Rf+(Rm-Rf)*Beta
	5%+(9%-5%)*0.88
	8.52%	(Answer)