Question

If the market's required rate of return is 13% and the risk-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.
Portfolio required return
Suppose you are the money manager of a $4.59 million investment fund. The fund consists of four stocks with the following investments and betas:
Stock Investment Beta
A $ 260,000 1.50
B 360,000 - 0.50
C 1,220,000 1.25
D 2,750,000 0.75

Answer 1

Answer: 11.27%

Explanation:

First calculate the portfolio beta which is a weighted average of the individual betas;

= (260,000/4,590,000 * 1.50) + (360,000/4,590,000 * -0.5) + (1,220,000/4,590,000 * 1.25) + (2,750,000/4,590,000 * 0.75)

= 0.827342

Use CAPM to calculate the required return ;

= risk free rate + beta ( market return - risk free rate)

= 3% + 0.827342(13% - 3%)

= ‭0.1127342‬

= 11.27%