Question

Suppose you are the money manager of a $4.57 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment	Beta
A	$   240,000	1.50
B	400,000	(0.50)
C	980,000	1.25
D	2,950,000	0.75

If the market's required rate of return is 12% 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

Stock	Investment	Weight	Beta	Weight*beta
a	b	c=b/4570000	d	e=c*d
A	$            2,40,000	0.05	1.5	0.07877
B	$            4,00,000	0.09	-0.5	-0.04376
C	$            9,80,000	0.21	1.25	0.26805
D	$          29,50,000	0.65	0.75	0.48414
Total	$          45,70,000	1.00		0.7872
Required return = Rf+ B(Rm-Rf)
Where,
Rf = Risk Free Return
B= Beta
Rm = Market rate of return
Rm-Rf= Risk Premium
=0.04+0.7872*(0.12-0.04)
=0.04+0.7872*(0.08)
=10.3 %