Question

Suppose you are the money manager of a $4.71 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment	Beta
A	$   480,000	1.50
B	600,000	(0.50)
C	1,380,000	1.25
D	2,250,000	0.75

If the market's required rate of return is 10% and the risk-free rate is 5%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Ans 9.07%

Stock	INVESTMENT (i)	Beta (ii)	Investment* Beta (i)* (ii)
A	4,80,000	1.50	7,20,000.00
B	6,00,000	(0.50)	(3,00,000.00)
C	13,80,000	1.25	17,25,000.00
D	22,50,000	0.75	16,87,500.00
Total	47,10,000		38,32,500.00
AVERAGE BETA =	(INVESTMENT * BETA) / TOTAL INVESTMENT
	3832500 / 4710000
	0.813694268

Required Return =	Risk free Return + (Market Return - Risk free return)* Beta
Required Return =	5% + (10% - 5%)* 0.813694268
Required Return =	9.07%