Question

5. The 3410 Investment Fund has total capital of $500 mil Stock $160 million 32 4.0 1.0 64 16 al of $500 million invested in 5 stocks: Investment Stock's Beta 0.5 -16 $120 million 24 2.0 4 $80 million 16 $80 million 16 $60 million ez 3.0 56 The current risk-free rate is 6%, whereas market returns have the following tay distribution: Probability Market Return 2 0.1 0.2 7% of 9% 2018 ER = .06+108 [11] =.258 0.4 0.2 11% 044 0.1 13% 2026 15% ols a. What is the fund's beta? b. What is the market risk premium? c. What is the fund's required rate of return? d. The fund is considering an additional $50 million investment in a new stock with a beta of 2.0. What is the expected rate of return on this new stock?

Answer 1

1.
=Sum(beta*Investment)/Sum(Investment)
=(0.5*160+2*120+4*80+1*80+3*60)/500
=1.80

2.
=Sum(probability*returns)
=0.1*7%+0.2*9%+0.4*11%+0.2*13%+0.1*15%-6%
=5.00%

3.
=risk free rate+beta*market risk premium
=6%+1.80*5.00%
=15.00%

4.
=6%+2*5%
=16.00%