Question

Suppose you manage a $3.87 million fund that consists of four stocks wuth the following investments:

Stock/Investment/Beta

A $300000 1.50

B 300000 -0.50

C 1020000 1.25

D 2250000 0.75

If market's required rate if return is 12% and the risk free rate is 4%, What is the fund's required rate of return?

Answer 1

Ans 10.74%

Stock	INVESTMENT (i)	Beta (ii)	Investment* Beta (i)* (ii)
A	3,00,000	1.50	4,50,000.00
B	3,00,000	(0.50)	(1,50,000.00)
C	10,20,000	1.25	12,75,000.00
D	22,50,000	0.75	16,87,500.00
Total	38,70,000		32,62,500.00
AVERAGE BETA =	(INVESTMENT * BETA) / TOTAL INVESTMENT
	3262500 / 3870000
	0.843023256
Required Return =	Risk free Return + (Market Return - Risk free return)* Beta
Required Return =	4% + (12% - 4%)*0.843023256
Required Return =	10.74%