Peter Griffin serves as a investment manager at Greshak Investment Fund which ha

Question

Peter Griffin serves as a investment manager at Greshak Investment Fund which has $3 million invested in the following stocks. The required rate of return on the market is 11.00 percent and the risk-free rate is 5.00 percent. What rate of return should investors expect (and require) on this portfolio?

Stock

Beta

1

1.20

2

0.50

3

1.40

4

0.75

Select one:

a. 10.56%

b. 10.83%

c. 11.11%

d. 11.38%

e. 11.67%

Stock

Amount

Beta

1

$1,075,000

1.20

2

     675,000

0.50

3

     750,000

1.40

4

     500,000

0.75

$3,000,000

Explanation / Answer

Answer is c. 11.11%

Portfolio beta = 1.2 * 1075000/3000000 + .5 × 675000/3000000 + 1.4×750000 / 3000000 + .75 × 500000/3000000

=1.0175

Rate of return (ke) is calculated by capm model,

Ke = Rf + beta (rm - Rf) , Rf = risk free rate , rm = retu3 market

= 5% + 1.0175 (11 - 5 )%

=11.11%

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