Question

PORTFOLIO REQUIRED RETURN

Suppose you are the money manager of a $5.15 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock Investment Beta

A $ 500,000 1.50

B 400,000 (0.50)

C 1,500,000 1.25

D 2,750,000 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

Beta of portfolio is calculated in excel and screen shot provided below:

Beta of portfolio is 0.87.

Risk free rate = 6%

Market return = 11%

Required rate of return of company stock is calculated below using CAPM formula:

Required rate of return = Risk free rate + (Market Return - Risk free rate) × Beta

                                    = 6% + (11% - 6%) × 0.87

                                    = 6% + (5% × 0.87)

                                    = 6% + 4.35%

                                    = 10.35%

Hence, required rate of return of company stock is 10.35%.