Question

Suppose you manage a $4.815 million fund that consists of four stocks with the following investments:

Stock Investment Beta

A $260,000 1.50

B $775,000 -0.50

C $1,180,000 1.25

D $2,600,000 0.75

If the market's required rate of return is 11% and the risk-free rate is 5%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Step-1:Calculation of Beta of Fund
	Stock	Investment	Beta	Weight	Weighted Beta
		a	b	c=a/4815000	d=b*c
	A	$          2,60,000	1.50	0.0540	0.08
	B	$          7,75,000	-0.50	0.1610	-0.08
	C	$       11,80,000	1.25	0.2451	0.31
	D	$       26,00,000	0.75	0.5400	0.40
	Total	$       48,15,000		1.0000	0.71
	So, Beta of Fund is 0.71
Step-2:Calculation of fund's required return
As per Capital Asset Pricing Method,
	Required Return		=	Risk Free Rate+Beta*(Market Return-Risk Free return)
			=	5%	+	0.71*(11%-5%)
			=	5%	+	4.26%
			=	9.26%