Suppose you are the money manager of a $4.16 million investment fund. The fund consists of four stocks with the following investments and betas:
Stock | Investment | Beta | ||
A | $ 380,000 | 1.50 | ||
B | 400,000 | (0.50 | ) | |
C | 1,480,000 | 1.25 | ||
D | 1,900,000 | 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.
Stock | Investment ($) | Beta | Calculation of weights | Weights |
A | 380000 | 1.50 | 380000/4160000 | 0.09 |
B | 400000 | -0.50 | 400000/4160000 | 0.10 |
C | 1480000 | 1.25 | 1480000/4160000 | 0.36 |
D | 1900000 | 0.75 | 1900000/4160000 | 0.46 |
Total | 4160000 | |||
We know, | ||||
Beta of portfolio= Weighted average | ||||
(0.09*1.50)+(0.10*-0.5)+(0.36*1.25)+(0.46*0.75) | ||||
0.88 | ||||
Given, | ||||
Return from market (Rm) | 9% | |||
Risk free rate (Rf) | 5% | |||
We know, | ||||
As per CAPM, | ||||
Required rate of return= Rf+(Rm-Rf)*Beta | ||||
5%+(9%-5%)*0.88 | ||||
8.52% | (Answer) |
Suppose you are the money manager of a $4.16 million investment fund. The fund consists of...
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