Question

Suppose you are the money manager of a $4.22 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment		Beta
A	$   260,000		1.50
B	300,000		(0.50	)
C	1,260,000		1.25
D	2,400,000		0.75

If the market's required rate of return is 8% and the risk-free rate is 5%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

  %

Answer 1

Ans 7.57%

Stock	INVESTMENT (i)	Beta (ii)	Investment* Beta (i)* (ii)
A	2,60,000	1.50	3,90,000.00
B	3,00,000	(0.50)	(1,50,000.00)
C	12,60,000	1.25	15,75,000.00
D	24,00,000	0.75	18,00,000.00
Total	42,20,000		36,15,000
AVERAGE BETA =	(INVESTMENT * BETA) / TOTAL INVESMENT
	3615000 / 4220000
	0.856635071
Required Return =	Risk free Return + (Market Return - Risk free return)* Beta
Required Return =	5% + (8% - 5%)*0.856635071
Required Return =	7.57%