Question

QUESTION 16 Use CAPM to estimate the Required Return of the Pitt Investment Fund. The Market Return is 12% and the Risk-Free Rate is equal to 2%. Stock Investment Amount Beta $200,000 1.75 $300.000 -0.50 $500,000 1.50 $1,000,000 0.75 A 10.0% 8.8.8% 6. 10.5% D. 12.2%

Answer 1

Answer is

option c) 10.5%

First iam going to explain the steps and how can we arrive at the answer and then i show the excel template used to findout the required return as an image file. Please kindly follow the steps to findout the result.

We have given different stocks and investment amount along with the beta value of the stocks.the formula for findout the required rate of investment is given below and the table after the formula can show the calculations.

required rate of investment = Risk free rate + beta * (expected market return - risk free rate )

RETURN = Investment amount * required rate

Required return = (Total return / total investment) *100

risk free rate = 2%

expected market return = 12%

Calculation table

RRI STOCK INVESTMENT AMOUNT BETA RRI 200000 1.75 (2-1.75*(12-2))/100 300000 -0.5 (2-0.5*(12-2))/100 500000 1.5 (2+1.5*(12-2))/100 1000000 0.75 (2+0.75*(12-2)/100 TOTAL 2000000 RETURN 19.50% 200000 * 19.50% -3.00% 300000 * -3.00% 17.00% 500000 * 17.00% 9.50% 1000000 * 9.50% RETURN 39000 -9000 85000 95000 210000

the calculations are showed in the above excel sheet.

so we know that the equation for

required return = (total return / total investment amount ) *100

= (210000/2000000)*100

= 10.5 %

excel sheet is given below

А. STOCK INVESTMENT AMOUNT BETA RRI RETURN 200000 1.75 20% 39000 300000 -0.5 -3% -9000 500000 1.5 17% 85000 1000000 0.75 9.50000% 95000 TOTAL 2000000 210000 RR 10.5%

so the answer is

required return = 10.5%