Portfolio required return Suppose you are the money manager of a $4.8 million in

Question

Portfolio required return

  Suppose you are the money manager of a $4.8 million investment fund.  The fund consists of 4 stocks with the following investments and betas:

If the market's required rate of return is 12% 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 $   380,000                                 1.50 B 440,000                                 - 0.50 C 1,380,000                                 1.25 D 2,600,000                                 0.75

Explanation / Answer

Required Rate of Return of

Stock A: = Rf+ (Rm-Rf)*Beta = 7 + (12-7)*1.50 = 14.50%

Stock B: = Rf+ (Rm-Rf)*Beta = 7 + (12-7)*-0.50 = 4.50%

Stock C: = Rf+ (Rm-Rf)*Beta = 7 + (12-7)*1.25 = 13.25%

Stock D: = Rf+ (Rm-Rf)*Beta = 7 + (12-7)*0.75 = 10.75%

Fund's Required Rate of Return = 14.50*0.38/4.8 + 4.5*0.44/4.8 + 13.25*1.38/4.8 + 10.75*2.6/4.8 = 11.19%

Answer: 11.19%

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