In: Finance
Assume that you are 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%.
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 |
Based on the CAPM wat rate of return should investors require on this fund?
Ra = Rrf + ( B a X ( R m - Rrf) | ||||||||||
Ra = Expected return on a security | ||||||||||
Rrf = Risk-free rate | ||||||||||
Ba = Beta of the security | ||||||||||
Rm = Expected return on market | ||||||||||
Note: Risk Premium = (Rm – Rrf) | ||||||||||
Stock | Rrf % | "+" | "( | Beta | "X" | Rm | "-" | Rrf | )" | |
A | 5% | "+" | "( | 1.20 | "X" | 11% | "-" | 5% | )" | |
B | 5% | "+" | "( | 0.50 | "X" | 11% | "-" | 5% | )" | |
C | 5% | "+" | "( | 1.40 | "X" | 11% | "-" | 5% | )" | |
D | 5% | "+" | "( | 0.75 | "X" | 11% | "-" | 5% | )" | |
Stock | Rrf % | "+" | "( | Beta | "X" | Rm - Rrf | )" | |||
A | 5% | "+" | "( | 1.20 | "X" | 6% | )" | |||
B | 5% | "+" | "( | 0.50 | "X" | 6% | )" | |||
C | 5% | "+" | "( | 1.40 | "X" | 6% | )" | |||
D | 5% | "+" | "( | 0.75 | "X" | 6% | )" | |||
Stock | Rrf % | "+" | Beta X Rm - Rrf | |||||||
A | 5% | "+" | 7.2% | |||||||
B | 5% | "+" | 3.0% | |||||||
C | 5% | "+" | 8.4% | |||||||
D | 5% | "+" | 4.5% | |||||||
Stock | Ra = | |||||||||
A | 12.2% | |||||||||
B | 8.0% | |||||||||
C | 13.4% | |||||||||
D | 9.5% | |||||||||