Question

Suppose you are the money manager of a $3.74 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment		Beta
A	$   320,000		1.50
B	400,000		(0.50	)
C	1,020,000		1.25
D	2,000,000		0.75

If the market's required rate of return is 13% and the risk-free rate is 5%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

  %

Answer 1

Ans 11.53%

Stock	INVESTMENT (i)	Beta (ii)	Investment* Beta (i)* (ii)
A	3,20,000	1.50	4,80,000.00
B	4,00,000	(0.50)	(2,00,000.00)
C	10,20,000	1.25	12,75,000.00
D	20,00,000	0.75	15,00,000.00
Total	37,40,000		30,55,000
AVERAGE BETA =	(INVESTMENT * BETA) / TOTAL INVESMENT
	3055000 / 3740000
	0.81684492
Required Return =	Risk free Return + (Market Return - Risk free return)* Beta
Required Return =	5% + (13% - 5%)*0.81684492
Required Return =	11.53%