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: Stock Investment Beta A $200,000 1.50 B $300,000 -0.50 C $500,000 1.25 D $1,000,000 0.75.

A) 9.58%
B) 10.09%
C) 10.62%
D) 11.18%
E) 11.77%

Answer 1

The required rate of return for the Global Investment Fund is calculated using the weighted average beta of the fund's assets and the Capital Asset Pricing Model (CAPM). The weighted average beta is 0.7625, and using the CAPM formula, the required rate of return is found to be 11.77%.

Step-by-step explanation:

To calculate the required rate of return for the Global Investment Fund, we will use the Capital Asset Pricing Model (CAPM) formula, which is expressed as:

Required rate of return = Risk-free rate + (Beta * (Market's required rate of return - Risk-free rate))

First, we need to find the weighted average beta of the fund's assets. This is calculated by multiplying each stock's beta by the proportion of the total fund's value that it represents and summing these products:

• Total investment = $200,000 + $300,000 + $500,000 + $1,000,000 = $2,000,000
• Weighted average beta = (1.50 * $200,000/$2,000,000) + (-0.50 * $300,000/$2,000,000) + (1.25 * $500,000/$2,000,000) + (0.75 * $1,000,000/$2,000,000)
• Weighted average beta = 0.15 + (-0.075) + 0.3125 + 0.375
• Weighted average beta = 0.7625

Using the CAPM formula with the weighted average beta:

Required rate of return = 7.00% + (0.7625 * (13.25% - 7.00%))

Required rate of return = 7.00% + (0.7625 * 6.25%)

Required rate of return = 7.00% + 4.765625%

Required rate of return = 11.765625%, which can be rounded to 11.77% (Option E)