Question

3. Assume that you sure that you are the portfolio manager of the Delaware Fund, a S4 million mutual fund that contains following stocks: Stock A B C D Amount $400,000 $600,000 $1,000,000 $2,000,000 Beta -1.20 0.70 1.5 0.9 The required rate of return in the market is 10.00% and the risk-free rate 3.00%. What rate of return should investors require on their investment in this fund? (15 points) tu nall for $950 and have a par value of $1,000. They pay a $12% annual coupon and 1 120

Answer 1

Fund's Beta = $\sum_{i=1}^{n}$ [Weight_i * Beta_i]

= [(400,000/4,000,000) * (-1.20)] + [(600,000/4,000,000) * 0.70] + [(1,000,000/4,000,000) * 1.50] + [(2,000,000/4,000,000) * 0.90]

= -0.12 + 0.105 + 0.375 + 0.45 = 0.81

Fund's Required Return = Risk-free Rate + [Beta * (Market's Required Rate - Risk-free Rate)]

= 3% + [0.81 * (10% - 3%)]

= 3% + [0.81 * 7%] = 3% + 5.67% = 8.67%