Question

Suppose you are the money manager of a $4.37 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment	Beta
A	$   200,000	1.50
B	320,000	(0.50)
C	1,300,000	1.25
D	2,550,000	0.75

If the market's required rate of return is 10% and the risk-free rate is 3%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Ans 8.89%

Stock	INVESTMENT (i)	Beta (ii)	Investment* Beta (i)* (ii)
A	2,00,000	1.50	3,00,000.00
B	3,20,000	(0.50)	(1,60,000.00)
C	13,00,000	1.25	16,25,000.00
D	25,50,000	0.75	19,12,500.00
Total	43,70,000		36,77,500
AVERAGE BETA =	(INVESTMENT * BETA) / TOTAL INVESMENT
	3677500 / 4370000
	0.841533181
Required Return =	Risk free Return + (Market Return - Risk free return)* Beta
Required Return =	3% + (10% - 3%)*0.841533181
Required Return =	8.89%