Question

Suppose you are the money manager of a $4.98 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment		Beta
A	$   440,000		1.50
B	600,000		(0.50	)
C	940,000		1.25
D	3,000,000		0.75

If the market's required rate of return is 12% 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 10.32%

Stock	INVESTMENT (i)	Beta (ii)	Investment* Beta (i)* (ii)
A	4,40,000	1.50	6,60,000.00
B	6,00,000	(0.50)	(3,00,000.00)
C	9,40,000	1.25	11,75,000.00
D	30,00,000	0.75	22,50,000.00
Total	49,80,000		37,85,000.00
AVERAGE BETA =	(INVESTMENT * BETA) / TOTAL INVESTMENT
	3785000 / 4980000
	0.760040161

Required Return =	Risk free Return + (Market Return - Risk free return)* Beta
Required Return =	5% + (12% - 5%) * 0.760040161
Required Return =	10.32%