Suppose you are the money manager of a $4.88 million investment fund. The fund consists of four stocks with the following investments and betas:
Stock | Investment | Beta | ||
A | $ 240,000 | 1.50 | ||
B | 700,000 | (0.50 | ) | |
C | 1,240,000 | 1.25 | ||
D | 2,700,000 | 0.75 |
If the market's required rate of return is 12% and the risk-free rate is 6%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.
Portfolio beta=Respective beta*Respective weight
=(240,000/4,880,000*1.5)+(700,000/4,880,000*-0.5)+(1,240,000/4,880,000*1.25)+(2,700,000/4,880,000*0.75)
=0.734631147
Required return=risk free rate+beta*(market rate-risk free rate)
=6+0.734631147*(12-6)
=10.41%(Approx).
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