Question

Suppose you are the money manager of a $4.64 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta А $ 420,000 1.50 600,000 (0.50 ) 1,320,000 1.25 2,300,000 0.75 If the market's required rate of return is 9% 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. %

Answer 1

Beta = (420,000 / 4,640,000)*1.5 + (600,000 / 4,640,000)*(-0.5) + (1,320,000 / 4,640,000)*1.25 + (2,300,000 / 4,640,000)*0.75

Beta = 0.135776 - 0.064655 + 0.355603 + 0.371767

Beta = 0.7985

Required rate of return = Risk free rate + beta(market return - risk free rate)

Required rate of return = 6% + 0.7985(9% - 6%)

Required rate of return = 6% + 2.3955%

Required rate of return = 8.40%