Suppose you are the money manager of a $5.44 million investment fund. The fund consists of 4...

Question:

Suppose you are the money manager of a $5.44 million investment fund. The fund consists of 4 stocks with the following investments and betas:

Stock Investment Beta
A $ 500,000 1.50
B 800,000 - 0.50
C 1,340,000 1.25
D 2,800,000 0.75

If the market's required rate of return is 10% and the risk-free rate is 7%, what is the fund's required rate of return?

Beta of a Portfolio:

A portfolio is comprised of investments in several stocks in some proportion. Each stock has its own return and risk (beta). The beta of portfolio is the weighted sum of beta of each individual stock.

Answer and Explanation:

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The fund's required rate of return is 9.28%

Calculating beta of portfolio:

Total investment = $5.44 million = $5,440,000

  • weight of stock A =...

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Using the Systematic Risk Principle & Portfolio Beta

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Chapter 12 / Lesson 3
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In this lesson, we'll discuss how investors must understand the systematic risk principle in their portfolio. We'll also explain how investors can measure and define the risk of their portfolios using betas.


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