83 Risk in a Portfolio Context The CAPM Problem WalkThrough

8-3: Risk in a Portfolio Context: The CAPM Problem Walk-Through Portfolio required return Suppose you are the money manager of a $4.23 million investment fund. The fund consists of 4 stocks with the following investments and betas: Stock Investment $ 220,000 620,000 1,340,000 2,050,000 Beta 1.50 0.50 1.25 0.75 If the market\'s required rate of return is 9% and the risk free rate is 6%, what is the fund\'s requred rate of return? Round your answer to two deanna places. 8.73 %

Solution

Portfolio beta=Respective betas*Respective investment weights

=(220000/4,230,000*1.5)+(620000/4,230,000*-0.5)+(1,340,000/4,230,000*1.25)+(2,050,000/4,230,000*0.75)

=0.764184397

required return= risk-free rate +Beta*(MArket rate- risk-free rate )

=6+0.764184397*(9-6)

which is equal to

=8.29%(Approx).