Question

PORTFOLIO REQUIRED RETURN

Suppose you are the money manager of a $4.95 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment	Beta
A	$   480,000	1.50
B	660,000	(0.50)
C	1,060,000	1.25
D	2,750,000	0.75

If the market's required rate of return is 12% 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.

%

Answer 1

Ans 10.58%

Stock	INVESTMENT (i)	Beta (ii)	Investment* Beta (i)* (ii)
A	4,80,000	1.50	7,20,000.00
B	6,60,000	(0.50)	(3,30,000.00)
C	10,60,000	1.25	13,25,000.00
D	27,50,000	0.75	20,62,500.00
Total	49,50,000		37,77,500.00
AVERAGE BETA =	(INVESTMENT * BETA) / TOTAL INVESTMENT
	3777500 / 4950000
	0.763131313

Required Return =	Risk free Return + (Market Return - Risk free return)* Beta
Required Return =	6% + (12% - 6%)*0.763131313
Required Return =	10.58%