Question

Portfolio Required Retur Suppose you manage a $3.94 million fund that consists of four stocks with the following investments: Stock Beta Investment $360,000 550,000 980,000 2,050,000 -0.50 1.25 0.75 If the market's required rate of return is 10% and the risk free rate is on what is the lund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places stery

Answer 1

Find the required return on each stock using the CAPM (capital assets
pricing model) and then find the required return for the fund.
Under the Capital Asset pricing model
Rs = Rf + Beta*(Rm-Rf)
Rs = Return on security
Rf = risk free rate
Rm = required return on market
Stock A
Rf	0.06
Rm	0.1
Beta	1.5
Rs = .06 + 1.5*(.1 - .06)
Rs	0.12
Stock B
Rf	0.06
Rm	0.1
Beta	-0.5
Rs = .06 + (-.5)*(.1 - .06)
Rs	0.04
Stock C
Rf	0.06
Rm	0.1
Beta	1.25
Rs = .06 + 1.25*(.1 - .06)
Rs	0.11
Stock D
Rf	0.06
Rm	0.1
Beta	0.75
Rs = .06 + .75*(.1 - .06)
Rs	0.09
Stock	Investment	Portfolio weight	Beta	Rs	Portfolio weight*Rs
A	360000	9.14%	1.5	0.12	0.0110
B	550000	13.96%	-0.5	0.04	0.0056
C	980000	24.87%	1.25	0.11	0.0274
D	2050000	52.03%	0.75	0.09	0.0468
SUM	3940000			SUM	0.0907
Find the portfolio weight for each stock in the portfolio
and multiply that by Rs(required return) for each stock.
Add the resulting values.
The sum of the resulting values is the required return for the portfolio.
The required return of the portfolio is .0907.
The required return of the portfolio is 9.07%.