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Problem Walk-Through Problem Walk-Through Problem Walk-Through Problem Walk-Through Problem Walk-Through Problem Walk-Through Problem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-Through Problem Walk-Through Portfolio required return Suppose you are the money manager of a S3.77 million investment fund. The fund consists of 4 stocks with the following investments and betas: If the market's required rate of return is 13% and the risk-free rate is 4%. what is the fund's required rate of return? Round your answer to two decimal places. % A mutual fund manager has a S20 million portfolio with a beta of 0.95. The risk-free rate is 4.25%. and the market risk premium is 5.5%. The manager expects to receive an additional S5 million, which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund's required return to be 13%. What should be the average beta of the new stocks added to the portfolio? Round your answer to two decimal places. Problem Walk-Through Problem Walk-Through Problem Walk-Through Problem Walk-Through Problem Walk-Through Problem Walk-Through Problem Walk-Through Problem Walk-Through Problem Walk-Through Problem Walk-Through Problem Walk-Through Evaluating risk and return Stock X has a 9.5% expected return, a beta coefficient of 0.8. and a 30% standard deviation of expected returns. Stock Y has a 13.0% expected return, a beta coefficient of 1.3. and a 20.0% standard deviation. The risk-free rate is 6%. and the market risk premium is 5%.

Explanation / Answer

Solution.

9. Calculation of rate of return.

Ra = Rf + B * (Rm - Rf)
. . . where
Ra is the required ROR of the risky asset
Rf is the risk free return (4%)
Rm is the expected ROR of the broad market (13%)
B is beta (% varies by stock)

Next, if your fund consisted of just one stock, it would be easy, but since you have 4 stocks, you have to determine the weight that each stock contributes to CAPM:

So now we can plug in the numbers to the CAPM formula, allowing for the contributing weight of each stock. Note that Rm - Rf = 0.13 - 0.04 = 0.09.

The fund's required ROR is 7.82%.

Stock Investment Weight A        420,000.00       11.14 B        420,000.00       11.14 C    1,180,000.00       31.30 D    1,750,000.00       46.42

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