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 17.50%, the risk-free rate is 3.00%, and the Fund's assets are as follows (Do not round your intermediate calculations.): Stock Investment Beta A $ 200,000 1.50 B 300,000 -0.50 C 500,000 1.25 D $1,000,000 0.75

Answer 1

Answer:

The required rate of return for the Global Investment Fund is 14.06%

Explanation:

Stock    Investment      Beta

A          $200,000        1.50

B          $300,000        -0.50

C          $500,000         1.25

D         $1,000,000        0.75

Total   2,000,000

First Calculate the portfolio Beta

Portfolio bet is the average beta calculated on the basis of weightage of each investment. The beta of every investment is multiplied with the weightage of each investment in a portfolio. The all the value is added to get the portfolio beta

Portfolio Beta = ( 1.5 x 200,000 / 2,000,000 ) + ( -0.50 x 300,000 / 2,000,000) + ( 1.25 x 500,000 / 2,000,000 ) + ( 0.75 x 1,000,000 / 2,000,000 )

Portfolio Beta = 0.15 - 0.075 + 0.3125 + 0.375

Portfolio beta = 0.7625

Required rate of return

Capital asset pricing model measure the expected return on an asset or investment. it is used to make decision for addition of specific investment in a well diversified portfolio.

Formula for rate of return

Expected return = Risk free rate + beta ( market risk premium )

Expected return = Risk free rate + beta ( Market return - Risk free rate )

Use portfolio beta here

Expected return = 3% + 0.7625 ( 17.50% - 3% )

Expected return = 14.06%