uppose you are the money manager of a $5.12 million investment fund. The fund co
ID: 2616043 • Letter: U
Question
uppose you are the money manager of a $5.12 million investment fund. The fund consists of four stocks with the following investments and betas: Stocks=abcd A=340,000 B=700,000 C=1380000 D=2,700,000 BETA FOR STOCK A=1.50 FOR B=0.50 FOR C=1.25 FOR D=0.75 If the market's required rate of return is 11% and the risk-free rate is 4%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places. My question was posted and answered previously with 10:30. However, that was not the right answer for me..... the first two probabilities for the stock is 8& for stock a and 36% for b....
Explanation / Answer
Value of Fund = $5,120,000
Value of Stock A = $340,000
Value of Stock B = $700,000
Value of Stock C = $1,380,000
Value of Stock D = $2,700,000
Weight of Stock A = $340,000 / $5,120,000
Weight of Stock A = 0.0665
Weight of Stock B = $700,000 / $5,120,000
Weight of Stock B = 0.1367
Weight of Stock C = $1,380,000 / $5,120,000
Weight of Stock C = 0.2695
Weight of Stock D = $2,700,000 / $5,120,000
Weight of Stock D = 0.5273
Fund Beta = Weight of Stock A*Beta of Stock A + Weight of Stock B*Beta of Stock B + Weight of Stock C*Beta of Stock C + Weight of Stock D*Beta of Stock D
Fund Beta = 0.0665*1.50 + 0.1367*0.50 + 0.2695*1.25 + 0.5273*0.75
Fund Beta = 0.90
Fund Required Rate of Return = Risk-free Rate + Fund Beta * (Market Rate of Return - Risk-free Rate)
Fund Required Rate of Return = 4% + 0.90 * (11% - 4%)
Fund Required Rate of Return = 10.30%
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