Question

Suppose you are the money manager of a $4.58 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A $ 360,000 1.50 B 520,000 (0.50) C 900,000 1.25 D 2,800,000 0.75

If the market's required rate of return is 12% and the risk-free rate is 4%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Particulars	Investment	Beta
A	$360,000	1.5
B	$520,000	-0.5
C	$900,000	1.25
D	$2,800,000	0.75
Total	$4,580,000

Computation of Weights :

Weight of A = $ 360000/$ 45,80000= 0.0786

Weight of B = $ 520000/$ 4580000=0.1135

Weight of C= $ 900000/$ 4580000=0.1965

Weight of D = $ 2800000/$ 4580000=0.6114

We know that Portfolio of Beta = Weighted Beta

Particulars	Investment	Beta	Weights	Weighted Beta( Beta * Weights
A	$360,000	1.5	0.0786	0.1179
B	$520,000	-0.5	0.1135	-0.05675
C	$900,000	1.25	0.1965	0.245625
D	$2,800,000	0.75	0.6114	0.45855
Total	$4,580,000		1	0.765325

Given Risk free rate = 4%, Market return = 12%

We know that According to CAPM ModelExpected return on the Portfolio = Risk free rate + Beta of portfolio( Market return - Risk free return)

= 4% + 0.765325( 12%-4%)

= 4% + 6.1226%

= 10.1226%

Hence Expected rate of return on portfolio is 10.1226%

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