Joel Foster is the portfolio manager of the SF Fund, a $3 million hedge fund tha

Question

Joel Foster is the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect (and require) on this fund?

Stock           Amount          Beta

   A               $1,075,000     1.20

   B                    675,000     0.50

   C                    750,000    1.40

   D                    500,000    0.75

    Total         $3,000,000

a. 10.56%

b. 10.83%

c. 11.11%

d. 11.38%

e. 11.67%

Explanation / Answer

first we calculate the portfolio beta

required market return= 11%

risk free rate = 5%

portfolio beta= 1.01735

expected market return = 5% +(11%-5%)1.01735

=5%+6.1041

=11.1041%

=11.11%

so correct answer is C

stock amount weight beta wt*beta A 1075000 0.358 1.2 0.4296 B 675000 0.225 0.5 0.1125 C 750000 0.25 1.4 0.35 D 500000 0.167 0.75 0.12525 3000000 1 1.01735

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