Suppose you are the money manager of a $3.68 million investment fund. The fund consists of four stocks with the following investments and betas:
Stock | Investment | Beta | ||
A | $ 340,000 | 1.50 | ||
B | 300,000 | (0.50 | ) | |
C | 1,040,000 | 1.25 | ||
D | 2,000,000 | 0.75 |
If the market's required rate of return is 9% 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.
%
Portfolio beta=Respective beta*Respective investment weight
=(340,000/3,680,000*1.5)+(300,000/3,680,000*-0.5)+(1,040,000/3,680,000*1.25)+(2,000,000/3,680,000*0.75)
=0.858695653
required return=risk-free rate +Beta*(market rate- risk-free rate)
=5+0.858695653*(9-5)
=8.43%(Approx).
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