Question
In: Finance
Suppose you are the money manager of a $4.78 million investment fund. The fund consists of...
Suppose you are the money manager of a $4.78 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta
A $ 420,000 1.50
B 720,000 (0.50)
C 940,000 1.25
D 2,700,000 0.75
If the market's required rate of return is 13% 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
|
a. We can return for each stock applying CAPM model. Working below: |
|||||||
|
Company |
Investment |
Investment weights |
Risk free rate |
Market Return |
Beta |
Return on stocks |
Expected returns |
|
Stocks |
I |
W = I / 4780000 |
Rf |
Rm |
B |
Ri = Rf+B*(Rm-Rf) |
W x Ri |
|
A |
420,000 |
0.08787 |
6.00% |
13.00% |
1.50 |
16.50% |
1.4498% |
|
B |
720,000 |
0.15063 |
6.00% |
13.00% |
-0.50 |
2.50% |
0.3766% |
|
C |
940,000 |
0.19665 |
6.00% |
13.00% |
1.25 |
14.75% |
2.9006% |
|
D |
2,700,000 |
0.56485 |
6.00% |
13.00% |
0.25 |
7.75% |
4.3776% |
|
Total = T |
4,780,000 |
1.00000 |
9.10% |
||||
Expected return of portfolio or fund = 9.10%
jeff jeffy answered 2 years agoRelated Solutions
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