Question

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.

Answer 1

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%