Question

Suppose you are the money manager of a $4.18 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment	Beta
A	$   420,000	1.50
B	400,000	(0.50)
C	1,460,000	1.25
D	1,900,000	0.75

If the market's required rate of return is 9% and the risk-free rate is 7%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

We can calculate Fund's Required rate of return as per CAPITAL ASSET PRICING MODEL :

[Where,

R_f = Risk Free rate of return

Beta = Market Risk or Weighted average Risk Of Fund

Rm = Market rate of return]

Required rate of return = 8.76 %

	B	C	D	E	F
	Stock	Investment	Beta	Weights	Weighted Beta
3		(GIVEN)	(GIVEN)	(working note given)
4				"=Investment In Each Stock /$C$10"	"=Beta x Weights"
5
6	A	420,000	1.50	0.100478468899522	0.15
7	B	400,000	(0.50)	0.095693779904306	(0.05)
8	C	1,460,000	1.25	0.349282296650718	0.44
9	D	1,900,000	0.75	0.454545454545455	0.34
10	TOTAL	4,180,000		1	0.88
11
		Required return of Fund	"=Rf + beta *(Rm-Rf)"
		Required return of Fund	"=0.07+F10*(0.09-0.07)"
		Required return of Fund =	8.76%

WORKING NOTES:

Weights can be calculated as below:

(calculated in attachment)