Question

Consider the following information and then calculate the required rate of return for the Scientific Investment Fund, which holds 4 stocks. The market's required rate of return is 16%, the risk-free rate is 4%, and the Fund's assets are as follows: Stock Investment Beta A $ 200,000 1.50 B 300,000 -0.50 C 500,000 1.25 D 1,000,000 1.3 Round it to two decimal places without the percent sign (%), e.g., 13.56.

Assume that the risk-free rate is 4 percent, and that the market risk premium is 5.7 percent. If a stock has a required rate of return of 12.2 percent, what is its beta? Round it to two decimal places, i.e., 1.25

Answer 1

1) Portfolio beta = [($200,000 / $2,000,000) × 1.50] + [($300,000 / $2,000,000) × (-0.50)] + [($500,000 / $2,000,000) × 1.25] + [($1,000,000 / $2,000,000) × 1.3] = 1.0375

Required rate of return = Risk-free rate + Portfolio beta(Market return - Risk-free rate)

Required rate of return = 0.04 + 1.0375(0.16 - 0.04)

Required rate of return = 0.1645 or 16.45%

2) Required rate of return = Risk-free rate + Beta(Market risk premium)

0.122 = 0.04 + Beta(0.057)

0.122 - 0.04 = Beta(0.057)

0.082 = Beta(0.057)

Beta = 0.082 / 0.057

Beta = 1.44