Question

In addition to​ risk-free securities, you are currently invested in the Tanglewood​ Fund, a​ broad-based fund of stocks and other securities with an expected return of and a volatility of . ​Currently, the​ risk-free rate of interest is . Your broker suggests that you add a venture capital fund to your current portfolio. The venture capital fund has an expected return of ​, a volatility of ​, and a correlation of with the Tanglewood Fund. Calculate the required return and use it to decide whether you should add the venture capital fund to your portfolio. The required return is nothing​%. ​ (Round to two decimal​ places.) Use the result of the above calculation to determine whether you should add the venture capital fund to your portfolio. Should you add the venture fund to your​ portfolio?

Answer 1

Answer: 6.29%

Step-by-step explanation:

Required return = Risk free rate + beta ( expected return - risk free rate)

Beta.

`= Correlation * (Volatility of venture)/(Volatility of fund) \\\\= 0.16 * (0.8117)/(0.2636) \\\\= 0.493`

Required return = 3.63% + 0.493(9.03% - 3.63%)

= 6.29%