Sinclair Fund has invested in securities of five corporations. The market value
ID: 2824298 • Letter: S
Question
Sinclair Fund has invested in securities of five corporations. The market value of each of the investments and the beta of the corporations is as follows:
Stock Investment Beta
1 $6 million 0.50
2 $5 million 0.80
3 $4 million 1.00
4 $3 million 1.40
5 $2 million 2.00
The risk free rate is 7 percent and the return on the market portfolio is 12 percent
a)What is the portfolio’s beta coefficient? (5 marks)
b)What is the fund’s required rate of return? (3 marks)
Explanation / Answer
STOCK Investment Beta INVESTMENT* BETA 1 60,00,000 0.50 30,00,000 2 50,00,000 0.80 40,00,000 3 40,00,000 1.00 40,00,000 4 30,00,000 1.40 42,00,000 5 20,00,000 2.00 40,00,000 2,00,00,000 1,92,00,000 A) BETA = (INVESTMENT * BETA) / INVESTMENT 19200000 / 20000000 0.96 B) REQUIRED RATE OF RETURN = Risk Free Rate + Market Risk Premium * Beta 7% + (12 % - 7%)*0.96 11.80%