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 12.00 % and a volatility of 25.00 %. Currently, the risk-free rate of interest is 4.00 %. Your broker suggests that you add a venture capital fund to your current portfolio. The venture capital fund has an expected return of 20.00 % , a volatility of 80.00 % , and a correlation of 0.20 with the Tanglewood Fund. Calculate the required return and use it to decide whether you should add the venture capital fund to your portfolio.

Question

Phillip Nichols

Business

30 October, 08:49

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 12.00 % and a volatility of 25.00 %. Currently, the risk-free rate of interest is 4.00 %. Your broker suggests that you add a venture capital fund to your current portfolio. The venture capital fund has an expected return of 20.00 % , a volatility of 80.00 % , and a correlation of 0.20 with the Tanglewood Fund. Calculate the required return and use it to decide whether you should add the venture capital fund to your portfolio.

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Answers (1)

Know the Answer?

Kyla Chapman · Answer 1

The answer is 9.12%

Explanation:

From the question stated, we calculate for the required return and use it to decide whether you should add the venture capital fund to your portfolio

Now,

For the calculation of required return

Required return = [ (risk free) + (correlation * Volatility venture/Volatility fund) (Expected return - Risk free) ]

[ 4.00% + (0.20 * 80.00% / 25.00%) * (12.00% - 4.00%) ]

[ 4.00% + (0.20 * 320%) * (8%) ]

[4.00% + (0.64) * (8%) ]

[ 4.00% + 0.0512]

= 0.0912 = 9.12

Therefore the required return is = 9.12%