Portfolio required return Suppose you are the money manager of a $4.13 million i

Question

Portfolio required return

Suppose you are the money manager of a $4.13 million investment fund. The fund consists of 4 stocks with the following investments and betas:

If the market's required rate of return is 11% 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 $   440,000                                 1.50 B 440,000                                 - 0.50 C 900,000                                 1.25 D 2,350,000                                 0.75

Explanation / Answer

required rate of return = rf + beta (market return - rf)

                                 = 7 + .8056 ( 11- 7)

                                = 7 + .8056 *4

                               = 7 + 3.22

                              = 10.22 %

stock Investment weights =Investment in individual security/Total Investment Beta weighted beta A 440,000 440,000 / 4,130,000 = .1065 1.50 .15975 B 440,000 .1066 -.50 - .0533 C 900,000 .2179 1.25 .27238 D 2,350,000 .5690 .75 .4268 Total 4,130,000 .8056

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