Final answer:
To calculate the required rate of return for the Global Investment Fund, we use the Capital Asset Pricing Model (CAPM) to find the expected rate of return for each stock based on its beta and then calculate the weighted average of these returns proportional to the investment amounts in each stock.
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). CAPM determines a stock's required rate of return as its risk-free rate plus the stock's beta times the market risk premium.
The market risk premium is the difference between the market's required rate of return and the risk-free rate. We will calculate the weighted average of these expected returns based on the investment amounts to find the required rate of return for the entire fund.
The formula for the expected rate of return for an individual stock using CAPM is:
E(Ri) = Rf + βi * (Rm - Rf),
where E(Ri) is the expected rate of return on stock i, Rf is the risk-free rate, βi is the beta of stock i, and Rm is the market's required rate of return.
For each stock in the Global Investment Fund, we calculate the expected rate of return and then take the weighted average:
- Stock A: E(Ra) = 7% + 1.50 * (13.25% - 7%)
- Stock B: E(Rb) = 7% - 0.50 * (13.25% - 7%)
- Stock C: E(Rc) = 7% + 1.25 * (13.25% - 7%)
- Stock D: E(Rd) = 7% + 1.75 * (13.25% - 7%)
The required rate of return for the fund is the sum of the products of each stock's expected rate of return and its proportion of the total investment:
Required return for the fund = (E(Ra) * (200,000 / 2,000,000)) + (E(Rb) * (300,000 / 2,000,000)) + (E(Rc) * (500,000 / 2,000,000)) + (E(Rd) * (1,000,000 / 2,000,000)).
Using this approach, you'll need to plug in the numbers to arrive at the final required rate of return for the Global Investment Fund.