Question

Suppose you are the money manager of a $4.68 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment	Beta
A	$   480,000	1.50
B	560,000	(0.50)
C	1,340,000	1.25
D	2,300,000	0.75

If the market's required rate of return is 11% and the risk-free rate is 7%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

%

Answer 1

Fund's required rate of return = risk free rate + (beta of fund * (market's required rate of return - risk free rate))

beta of fund = sum of weighted beta of all stocks in the fund

weighted beta of each stock = beta of stock * weight of stock

weight of stock = investment in stock / total value of fund

beta of fund = 0.820513

B C D Stock Investment Beta Weight 2 A 3 B 4C 5 D 6 Total 480,000 560,000 1.340.000 2.300.000 4,680,000 1.5 -0.5 1.25 0.75 0.10 0.12 0.29 0.49 Weighted beta 0.15 (0.06) 0.36 0.37 0.820513

Fund's required rate of return = risk free rate + (beta of fund * (market's required rate of return - risk free rate))

Fund's required rate of return = 7% + (0.820513 * (11% - 7%))

Fund's required rate of return = 10.28%