Question

Problem 8-7 Portfolio required return Suppose you are the money manager of a $4.51 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta $ 300,000 1.50 740,000 - 0.50 1,020,000 1.25 2,450,000 0.75 If the market's required rate of return is 8% 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.

Answer 1

Portfolio beta=Respective beta*Respective investment weight

=(300,000/4,510,000*1.5)+(740,000/4,510,000*-0.5)+(1,020,000/4,510,000*1.25)+(2,450,000/4,510,000*0.75)

=0.707871397

Required return=risk free rate+beta*(market rate-risk free rate)

=6+0.707871397*(8-6)

=7.42%(Approx).