Question
In: Finance
Suppose you are the money manager of a $4.38 million investment fund. The fund consists of...
Suppose you are the money manager of a $4.38 million investment fund. The fund consists of four stocks with the following investments and betas:
| Stock | Investment | Beta | ||
| A | $ 440,000 | 1.50 | ||
| B | 400,000 | (0.50 | ) | |
| C | 1,440,000 | 1.25 | ||
| D | 2,100,000 | 0.75 | ||
If the market's required rate of return is 12% 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 11.25%
| Stock | INVESTMENT (i) | Beta (ii) | Investment* Beta (i)* (ii) |
| A | 4,40,000 | 1.50 | 6,60,000.00 |
| B | 4,00,000 | (0.50) | (2,00,000.00) |
| C | 14,40,000 | 1.25 | 18,00,000.00 |
| D | 21,00,000 | 0.75 | 15,75,000.00 |
| Total | 43,80,000 | 38,35,000 | |
| AVERAGE BETA = | (INVESTMENT * BETA) / TOTAL INVESMENT | ||
| 3835000 / 4380000 | |||
| 0.875570776256 | |||
| Required Return = | Risk free Return + (Market Return - Risk free return)* Beta | ||
| Required Return = | 6% + (12% - 6%)*0.875570776256 | ||
| Required Return = | 11.25% |
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