Question

In: Finance

Assume that you are the portfolio manager of the SF Fund, a $3 million hedge fund...

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?

Solutions

Expert Solution

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%

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