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 13.25%, the risk-free rate is 7.00%, and the Fund’s assets are as follows:(hint: market beta =1.0) (2 pts)Stock Investment BetaA $ 200,000 1.50B 300,000 −0.50C 500,000 1.25D $1,000,000 0.75a. 9.58%b. 10.09%c. 10.62%d. 11.18%e. 11.77%

Answer 1

e. 11.77%

Step-by-step explanation:

To calculate the required rate of return for the Global Investment Fund it's necessary to use CAPM Model (Capital Asset Pricing Model) which states that relationship between the systematic market risk and the return of an assets.

The formula is as follows:

ER = Rf + Bi(ERm-Rf)

ER Expected Return of Investment

Rf Risk-Free Rate

Bi Beta of the Investment

ERm Expected Return of the Market

(Erm-Rf) Market Risk Premium

Calculating the return of each stock with its own beta we can know the expected return of each stock, then we divide the total return of the portfolio by the investment done and then we obtain the required rate of return.

(a) // (b) // (c) // (d)

16,4% // 3,9% // 14,8% // 11,7%

7,00% // 7,00% // 7,00% // 7,00%

1,5 // -0,5 // 1,25 // 0,75

13,25% // 13,25% // 13,25% // 13,25%

6,25% // 6,25% // 6,25% // 6,25%

200,000 // 300,000 // 500,000 // 1,000,000 $2,000,000

32,750 // 11,625 // 74,063 // 116,875 235,313

11,77%