Question

In: Finance

Suppose you are the money manager of a $4.37 million investment fund. The fund consists of...

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 $   460,000                                 1.50
B 680,000                                 (0.50)
C 1,380,000                                 1.25
D 1,850,000                                 0.75

If the market's required rate of return is 11% 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

Ans 9.96%

Stock INVESTMENT (i) Beta (ii) Investment* Beta (i)* (ii)
A                 4,60,000                      1.50                                      6,90,000.00
B                 6,80,000                   (0.50)                                   (3,40,000.00)
C              13,80,000                      1.25                                   17,25,000.00
D              18,50,000                      0.75                                   13,87,500.00
Total              43,70,000                                         34,62,500
AVERAGE BETA = (INVESTMENT * BETA) / TOTAL INVESMENT
3462500 / 4370000
0.792334096
Required Return = Risk free Return + (Market Return - Risk free return)* Beta
Required Return = 6% + (11% - 6%)*0.792334096
Required Return = 9.96%

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