Question

Consider the following information and then calculate the required rate of return for the Global Investment Fund, which holds 4 stocks. The market’s required rate of return is 13.0%, the risk-free rate is 6.00%, and the Fund's assets are as follows: Stock Investment Beta A $ 200,000 2.00 B 300,000 -0.60 C 500,000 1.20 D $1,000,000 1.00 10.58% 11.25% 12.37% 13.18% 13.77%

Answer 1

Answer:

The required rate of return for the Global Investment Fund is 12.37%.

Explanation:

The value of the portfolio is calculated as: Investment in A's value + Investment in B's value + Investment in C's value + Investment in D's value = 200,000 + 300,000 + 500,000 + 1,000,000 = 2,000,000.

Weighted of each investment is:

Stock A = 200,000/2,000,000 = 10%; Stock B = 300,000/2,000,000 = 15% ; Stock C = 500,000/2,000,000 = 25% and Stock D = 1,000,000/2,000,000 = 50%.

=> Beta of the portfolio = Beta of A x 10% + Beta of B x 15% + Beta of C x 25% + beta of D x 50% = 2 x 10% + -0.6 x 15% + 1.2 x 25% + 1 x 50% = 0.91

Apply the CAPM model to find the required rate of return of Global Investment Fund:

ERi = Rf + (ERM - Rf) x beta of the portfolio <=> ERi = 6% + (13%-6%) x 0.91 = 12.37%.