Suppose you are the money manager of a $4.02 million investment fund. The fund consists of four stocks with the following investments and betas:
Stock | Investment | Beta | ||
A | $ 460,000 | 1.50 | ||
B | 300,000 | (0.50 | ) | |
C | 1,560,000 | 1.25 | ||
D | 1,700,000 | 0.75 |
If the market's required rate of return is 8% 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.
Portfolio beta=Respective beta*Respective weight
=(460,000/4,020,000*1.5)+(300,000/4,020,000*-0.5)+(1,560,000/4,020,000*1.25)+(1,700,000/4,020,000*0.75)
=0.936567164
Required return=risk free rate+beta*(market rate-risk free rate)
=5+0.936567164*(8-5)
=7.81%(Approx).
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