Question

Suppose you are the money manager of a $4.48 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment		Beta
A	$   340,000		1.50
B	800,000		(0.50	)
C	1,140,000		1.25
D	2,200,000		0.75

If the market's required rate of return is 11% 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.

2. An individual has $20,000 invested in a stock with a beta of 0.8 and another $35,000 invested in a stock with a beta of 1.4. If these are the only two investments in her portfolio, what is her portfolio's beta? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Ans 1) 9.55%

Stock	INVESTMENT (i)	Beta (ii)	Investment* Beta (i)* (ii)
A	3,40,000	1.50	5,10,000.00
B	8,00,000	(0.50)	(4,00,000.00)
C	11,40,000	1.25	14,25,000.00
D	22,00,000	0.75	16,50,000.00
Total	44,80,000		31,85,000
AVERAGE BETA =	(INVESTMENT * BETA) / TOTAL INVESMENT
	3185000 / 4480000
	0.710937500000
Required Return =	Risk free Return + (Market Return - Risk free return)* Beta
Required Return =	6% + (11% - 6%)*0.7109375
Required Return =	9.55%

Ans 2) 1.18

Stock	INVESTMENT (i)	Beta (ii)	Investment* Beta (i)* (ii)
1	20,000	0.80	16,000.00
2	35,000	1.40	49,000.00
Total	55,000		65,000
AVERAGE BETA =	(INVESTMENT * BETA) / TOTAL INVESMENT
	65000 / 55000
	1.18