Question
In: Finance
6. PORTFOLIO REQUIRED RETURN Suppose you are the money manager of a $4.9 million investment fund....
6. PORTFOLIO REQUIRED RETURN
Suppose you are the money manager of a $4.9 million investment fund. The fund consists of four stocks with the following investments and betas:
| Stock | Investment | Beta |
| A | $ 240,000 | 1.50 |
| B | 400,000 | (0.50) |
| C | 1,260,000 | 1.25 |
| D | 3,000,000 | 0.75 |
If the market's required rate of return is 9% 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.
Solutions
Expert Solution
Beta of the portfolio = Weight of respective stocks * respective beta of the stocks
| Stock | Investment | Beta | Investment Weight (Respective Investment / Total Value) | Beta * Investment Weight |
| A | 2,40,000 | 1.5 | 0.0489795918367347 | 0.0734693877551020 |
| B | 4,00,000 | -0.5 | 0.0816326530612245 | -0.0408163265306122 |
| C | 12,60,000 | 1.25 | 0.2571428571428570 | 0.3214285714285710 |
| D | 30,00,000 | 0.75 | 0.6122448979591840 | 0.4591836734693880 |
| Total Value | 49,00,000 | 0.8132653061224490 |
As per CAPM,
Required Return =Risk Free rate + (Market Return - Risk Free Rate ) * Beta
= 6%+(9%-6%)*0.8132653061224490
= 8.44%
Answer = 8.44%
jeff jeffy answered 2 years agoRelated Solutions
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