Question

Suppose you are the money manager of a $5.18 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment	Beta
A	$   360,000	1.50
B	600,000	(0.50)
C	1,420,000	1.25
D	2,800,000	0.75

If the market's required rate of return is 12% and the risk-free rate is 3%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Portfolio beta=Respective beta*Respective investment weight

=(360,000/5,180,000*1.5)+(600,000/5,180,000*-0.5)+(1,420,000/5,180,000*1.25)+(2,800,000/5,180,000*0.75)

=0.794401544

required return= risk-free rate +Beta*(market rate- risk-free rate )

=3+0.794401544*(12-3)

=10.15%(Approx).