SUPPOSE YOU ARE THE MANAGER OF A $10,000,000 INVESTMENT FUND.THE FUND CONSISTS O

Question

SUPPOSE YOU ARE THE MANAGER OF A $10,000,000 INVESTMENT FUND.THE FUND CONSISTS OF 4 STOCKS WITHSTOCK A #3,000,000 INVESTMENT AND A BETA OF 1.5 STOCK B 32,000,000 INVESTNET AND A BETA OF 1.O sTOCK C $4,OOO,OOO AND A BETA OF 0.O AND STOCK D $1,000,000 AND A BETA OF2.O. tHE REQUIRED RATE OF RETURN IS 13% AND THE RISK-FREE RATE IS 6% WHAT IS THE FUNDS REQUIRED RATE OF RETURN ,R? YOU MUST FIRST FIND THE BETA FOR THE PORTFOLIO.tHEN USE IT TO CALCULATE THE REQUIRED RATE OF RETURN USING THE SML EQUATION. PLEASE SHOW ALL THE WORK SO I CAN UNDERSTAND THIS QUESTION.

Explanation / Answer

Beta of portfolio = (1.5 *3,000,000/10,000,000)+(1 * 2,000,000/10,000,000)+(0 *4,000,000/10,000,000)+(2 * 1,000,000/10,000,000)

          = .45+ .20+ 0+ .20

            = .85

Required rate of return = RF +[Beta (Rm-Rf)]

                     = 6 + [.85 (13-6)]

                     = 6 + [.85 * 7]

                     = 6 + 5.95

                     = 11.95%

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