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Old   #1 (permalink)
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Default find the required rate of return?

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

StockInvestmentBeta
A $400,000 1.50
B 600,000 -0.50
C 1,000,000 1.25
D 2,000,000 0.75

If the marketís required rate of return is 14% and the risk free rate is 6%, what is the fundís required rate of return?

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Old   #2 (permalink)
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Default find the required rate of return?

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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