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% |
Homework Answers
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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