Check My Click here to read the eBook: Risk in a Portfolio Context: The CAPm Pro

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Check My Click here to read the eBook: Risk in a Portfolio Context: The CAPm Problem Walk-Throug PORTFOLIO REQUIRED RETURN Suppose you are the money manager of a $4.31 milion investment fund. The fund consists of four stocks with the following investments and betas: Stock $ 300,000 380,000 1,180,000 2,450,000 Beta 1.50 (0.50) 1.25 l the market's required rate o return is 9% and the nsk-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. 12,300% Eide Feedback Incorrect Check My V

Explanation / Answer

Beta of a portfolio is the weighted average of betas of all the stocks in the portfolio

Weighted average beta = 0.83

As per capital asset pricing model,

Re = Rf + (Rm – Rf) x Beta

Where,

Re = Required rate of return

Rf = Risk free rate = 3%

Rm = Return on market = 9%

Beta = Beta of the portfolio = 0.83

So, Re = 3 + (9 – 3) x 0.83

= 3 + 4.98

= 7.98%

Calculations A B = A / 4310000 C D = B x C Stock Investment Weights Beta Weighted average A              300,000 6.96% 1.5             0.10 B              380,000 8.82%           (0.50)          (0.04) C          1,180,000 27.38% 1.25             0.34 D          2,450,000 56.84% 0.75             0.43 Total          4,310,000                 1 Total             0.83

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