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	$   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.

Answer 1

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%