Question
In: Finance
Suppose you manage a $2 million fund that consists of four stocks with the following investments:...
Suppose you manage a $2 million fund that consists of four stocks with the following investments:
| Stock | Investment | Beta | ||
| A | $200,000 | 1.50 | ||
| B | 300,000 | -0.50 | ||
| C | 600,000 | 1.25 | ||
| D | 900,000 | 0.75 | ||
If the market's required rate of return is 8% and the risk-free rate is 3%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.
Solutions
Expert Solution
Step 1: A fund's required rate of return is calculated usinf the formula
R(fund) = Risk free rate + Beta*(Market rate of return - Risk free rate of return)
where the beta = fund beta
Step 2: Now, we need to calculate fund beta
Fund Beta = 
Step 3: Calculate the weight of stock investment
Stock A = 200000/2000000
Stock B =300000/2000000
Stock C = 600000/2000000
Stock D =900000/2000000
| Stock | Investment | Weight |
| A | 200000 | 10% |
| B | 300000 | 15% |
| C | 600000 | 30% |
| D | 900000 | 45% |
| Total | 2000000 | 100% |
Step 4:Calculate the Fund beta using the equation in step 2
Fund Beta = [(Weight of stock A* Beta of stock A) + (Weight of stock B * Beta of stock B) + (Weight of stock C* Beta of stock C) + (Weight of stock D * Beta of Stock D)]
Fund Beta = 0.79
Step 5: Calculate the fund's required rate of return using the formula in step 1
Return(fund) = Risk free rate + Beta*(Market rate of return - Risk free rate of return)
Return(fund) = 0.03 + 0.79*(0.08 - 0.03)
Return(fund) = 6.95%
jeff jeffy answered 2 years agoRelated Solutions
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