Question

uppose you are the money manager of a $5.12 million investment fund. The fund consists of four stocks with the following investments and betas: Stocks=abcd A=340,000 B=700,000 C=1380000 D=2,700,000 BETA FOR STOCK A=1.50 FOR B=0.50 FOR C=1.25 FOR D=0.75 If the market's required rate of return is 11% and the risk-free rate is 4%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Fund's Required Return is 10.30%

Working:

a.
		Investments
	Stock A	$       3,40,000
	Stock B	$       7,00,000
	Stock C	$     13,80,000
	Stock D	$     27,00,000
	Total	$     51,20,000
b.
	Weight of:
	Stock A	$       3,40,000	/	$ 51,20,000	=	0.0664
	Stock B	$       7,00,000	/	$ 51,20,000	=	0.1367
	Stock C	$     13,80,000	/	$ 51,20,000	=	0.2695
	Stock D	$     27,00,000	/	$ 51,20,000	=	0.5273
		Total				1.0000
c.	Calculation of Beta of fund:
		Weight	Beta	Weighted Beta
	Stock A	0.0664	1.50	0.10
	Stock B	0.1367	0.50	0.07
	Stock C	0.2695	1.25	0.34
	Stock D	0.5273	0.75	0.40
				0.90
d.
	As per Capital Asset Pricing Model,
	Required Return		=	Risk Free rate + Beta x (Market Required return-Risk free return)
			=	4%	+	0.90	x	(11% -4%)
			=	10.30%