Problem 8-7 Portfolio required return Suppose you are the money manager of a $4.

Question

Problem 8-7
Portfolio required return

Suppose you are the money manager of a $4.74 million investment fund. The fund consists of 4 stocks with the following investments and betas:

If the market's required rate of return is 13% and the risk-free rate is 7%, what is the fund's required rate of return? Round your answer to two decimal places.
%

Stock Investment Beta A $   240,000                                 1.50 B 320,000                                 - 0.50 C 1,180,000                                 1.25 D 3,000,000                                 0.75

Explanation / Answer

Portfolio beta=Respective betas*Respective investment weights

=(240000/4,740,000*1.5)+(320000/4,740,000*-0.5)+(1180000/4,740,000*1.25)+(3,000,000/4,740,000*0.75)

=0.828059071

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

=7+0.828059071*(13-7)

which is equal to

=11.97%(Approx).

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