Question

Suppose you are the money manager of a $3.52 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock Investment Beta

A $   460,000 1.50

B 300,000 (0.50 )

C 960,000 1.25

D 1,800,000 0.75

If the market's required rate of return is 11% 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

Calculation of Beta

Stock	Investment	Weights(W)	Beta	W*Beta
A	$     460,000.00	13.07%	1.5	0.19602
B	$     300,000.00	8.52%	-0.5	-0.0426
C	$     960,000.00	27.27%	1.25	0.34091
D	$ 1,800,000.00	51.14%	0.75	0.38352
Total	$ 3,520,000.00	Beta		0.87784

According to CAPM

Market return (Rm)= 11%

Risk free rate (Rf)= 4%

Required Return of Portfolio = Rf + (Rm-Rf) * Beta

Required Return of Portfolio = 4% + (11%-4%)*0.87784

Required Return of Portfolio = 10.14%