Suppose you are the money manager of a $4.07 million investment fund. The fund consists of four stocks with the following investments and betas:
Stock | Investment | Beta |
A | $ 240,000 | 1.50 |
B | 560,000 | (0.50) |
C | 1,420,000 | 1.25 |
D | 1,850,000 | 0.75 |
If the market's required rate of return is 12% and the risk-free rate is 6%, 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
=(240,000/4,070,000*1.5)+(560,000/4,070,000*-0.5)+(1,420,000/4,070,000*1.25)+(1,850,000/4,070,000*0.75)
=0.796683046
required return= risk-free rate +Beta*(market rate- risk-free rate )
=6+0.796683046*(12-6)
=10.78%(Approx).
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