Suppose you mange a $4 million fund that consists of four stocks with the follow

Question

Suppose you mange a $4 million fund that consists of four stocks with the following investments

Stock                          Investment                        Beta

A                                    $400,000                         1.50

B                                      600,000                         -0.50

C                                     1,000,000                       1.25

D                                     2,000,000                       0.75

If the market's required rate of return is 14% and the risk-free rate is 6%, what is the funds required rate of return.  

Explanation / Answer

The weighted avg beta of the portfolio is -
400,000 x 1.5 = 600,000
600,000 x (.50) = (300,000)
1,000,000 x 1.25 = 1,250,000
2,000,000 x .75 = 1,500,000

Total Investment 4,000,000 Total beta 3,050,000 Weghted Avg Beta = .7625

Required Rate = RF + Beta(Market risk premium)
RR = 6% + .7625(14% - 6%) = 6% + .7625(8%) = 6% + 6.1% = 12.1%

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