Question

Portfolio Required Return

Suppose you manage a $5.47 million fund that consists of four stocks with the following investments:

Stock	Investment		Beta
A	$220,000		1.50
B	800,000		-0.50
C	1,500,000		1.25
D	2,950,000		0.75

If the market's required rate of return is 11% and the risk-free rate is 3%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Stock	Investment	Beta	Proportion (P)	Rf	P*Rf
A	220,000.00	1.5	0.04022	15	0.60
B	800,000.00	-0.5	0.14625	-1	-0.15
C	1,500,000.00	1.25	0.27422	13	3.56
D	2,950,000.00	0.75	0.53931	9	4.85
	5,470,000.00		1.00000	TOTAL	8.88

Fund's required rate of return = 8.88%

Note:

1.Rf = (Rm-Rf)*B + Rf ie A = (11-3)*1.5 + 3 = 15% and similarly change Beta for the rest.

2. Proprtion => A: 220000/5470000 = 0.04022 and similarly for the rest