Question

Suppose you are the money manager of a $4.44 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A $ 300,000 1.50 B 380,000 (0.50) C 1,260,000 1.25 D 2,500,000 0.75 If the market's required rate of return is 13% and the risk-free rate is 4%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

fund beta = sum of product of stock weight and stock beta

=300000/4440000*1.5+380000/4440000*0.5+1260000/4440000*1.25+2500000/4440000*0.75

=0.92117

As per CAPM

expected return = risk-free rate + beta * (expected return on the market - risk-free rate)

Expected return% = 4 + 0.92117 * (13 - 4)

Expected return% = 12.29