Question

Kaiser is the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect (and require) on this fund?

Stock	Amount	Beta
A	$1,075,000	1.20
B	675,000	0.50
C	750,000	1.40
D	500,000	0.75
	$3,000,000

*Show your formulas and formula inputs.

Answer 1

Given

Market return = 11%

Risk free rate = 5%

Amount invested = $ 30,00000

Computation of Portfolio Beta

We know that Portfolio Beta = Weighted Beta

Stock	Amount	Weight( Amount / Total amount invested)	Beta	Weighted Beta( Weight * Beta)
A	$1,075,000	$ 1075000/$ 30,00000= 0.3583	1.2	0.3583*1.2=0.43
B	$675,000	$ 675000/$ 30,00000= 0.225	0.5	0.225*0.5=0.1125
C	$750,000	$ 750000/$ 30,00000= 0.25	1.4	0.25*1.4=0.35
D	$500,000	$ 500000/$ 30,00000= 0.1667	0.75	0.1667*0.75= 0.125
Total	$3,000,000			1.0175

Hence portfolio Beta = 1.0175

Computation of Expected return on Portfolio:

We know that Expected Return on Portfolio= Risk free rate + Beta of Porfolio( Market return - Risk free Rate)

= 0.05+1.0175( 0.11-0.05)

= 0.05+1.0175( 0.06)

= 0.05+0.06105

= 0.11105

Hence Expected return on Portfolio is 0.11105 or 11.105% .

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