Question

a mutual fund manager expects her portfolio to earn a rate of return of 12% this year. the beta of her portfolio is 0.5. the rate of return available on risk-free assets is 5% and you expect the rate of return on the market portfolio to be 15%. what expected rate of return would you demand before you would be willing to invest in this mutual fund? note: do not round intermediate calculations. enter your answer as a whole percent. is this fund attractive to you?

Answer 1

According to the Capital Asset Pricing Model (CAPM), the expected rate of return on the mutual fund should be 10%, based on its beta of 0.5, a risk-free rate of 5%, and an expected market return of 15%. However, the mutual fund manager expects a 12% return, which is higher than the expected return, thus making the fund potentially attractive for investment.

Step-by-step explanation:

The student is seeking to understand the expected rate of return for a mutual fund and whether it is an attractive investment based on its beta, the risk-free rate, and the expected return of the market. The Capital Asset Pricing Model (CAPM) can be used to calculate the expected rate of return for the mutual fund. The formula for CAPM is:

E(Ri) = Rf + βi * (E(Rm) - Rf)

Where E(Ri) is the expected rate of return on the investment, Rf is the risk-free rate, βi is the beta of the investment, and E(Rm) is the expected return of the market. Plugging the values from the question we get:

E(Ri) = 5% + 0.5 * (15% - 5%)


E(Ri) = 5% + 0.5 * 10%


E(Ri) = 5% + 5%


E(Ri) = 10%

So, according to CAPM, an investor should demand a 10% return on this mutual fund to compensate for its risk level. However, the mutual fund manager expects a 12% return, which is higher than the 10% required by CAPM, hence this fund could be considered attractive as it potentially offers a higher return than required for its risk level.