Question

Suppose you are the money manager of a $4.42 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A $ 260,000 1.50 B 400,000 (0.50 ) C 1,460,000 1.25 D 2,300,000 0.75 If the market's required rate of return is 8% 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

Step 1:
	We need to calculate weighted average beta of fund
	Stock	Value	Wight	Beta	Weighted average beta
	a	b	c=b/4420000	d	e=c*d
	A	260000	0.06	1.50	0.09
	B	400000	0.09	-0.50	-0.05
	C	1460000	0.33	1.25	0.41
	D	2300000	0.52	0.75	0.39
	Total	4420000	1.00		0.8462
Step 2:
	Return on fund:
	Rf	6.00%
	Rm	8.00%
	Beta	0.8462
	R = Rf+ B(Rm-Rf)
	Where,
	Rf = Risk Free Return
	B= Beta
	Rm-Rf= Risk Premium
	=0.06+0.8462*(0.08-0.06)
	=0.06+0.8462*(0.02)
	=7.69 %