Question

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 10.00% 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

1.

10.56%

2.

10.08%

3.

10.83%

4.

11.67%

5.

11.38%

0 0
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Answer #1

Ans 2. 10.08%

Stock Amount (i) Beta (ii) Investment* Beta (i)* (ii)
A            10,75,000                      1.20                       12,90,000.00
B              6,75,000                      0.50                         3,37,500.00
C              7,50,000                      1.40                       10,50,000.00
D              5,00,000                      0.75                         3,75,000.00
Total            30,00,000                       30,52,500.00
AVERAGE BETA = (INVESTMENT * BETA) / TOTAL INVESMENT
3052500 / 3000000
1.0175
Required Return = Risk free Return + (Market Return - Risk free return)* Beta
Required Return = 5% + (10% - 5%)*1.0175
Required Return = 10.08%
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