Question

Suppose you are the money manager of a $2 million investment fund. The fund consists of four stocks with the following investments and betas. Stock Investment Beta A $200,000 1.50 B $300,000 -0.50 C $500,000 1.25 D $1,000,000 0.75 If the market required rate of returns is 28% and the risk-free is 12%:

i. Stock A required rate of return

a) 33.00%

b) 22.00%

c) 30.00%

d) 36.00%

Answer 1

The required rate of return for Stock A is calculated using the CAPM formula and is found to be 36.00%.

Step-by-step explanation:

To calculate the required rate of return for Stock A, we can use the Capital Asset Pricing Model (CAPM) formula:
RA = RF + βA(RM - RF)
where:
RA is the required rate of return for Stock A
RF is the risk-free rate of return (12%)
βA is the beta of Stock A (1.50)
RM is the market required rate of return (28%)
Plugging in the values, we get:
RA = 12% + 1.50(28% - 12%)
Simplifying the equation, we get:
RA = 0.12 + 0.24
RA = 0.36
So, the required rate of return for Stock A is 36.00%. Therefore, the correct answer is Option d) 36.00%.