Joel Foster is the portfolio manager of the SF Fund, a $3.5 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect (and require) on this fund? Stock Amount Beta A $1,075,000 1.20 B 675,000 0.50 C 1,250,000 1.40 D 500,000 0.75 3,500,000

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Adolfo

Business

3 March, 17:51

Joel Foster is the portfolio manager of the SF Fund, a $3.5 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect (and require) on this fund? Stock Amount Beta A $1,075,000 1.20 B 675,000 0.50 C 1,250,000 1.40 D 500,000 0.75 3,500,000

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Juliette Sharp · Answer 1

11.1022%

Explanation:

We have to calculate the weight of each stock:

Stock A = 1,075,000 / 3,500,000 = 0.307

Stock B = 675,000 / 3,500,000 = 0.192

Stock C = 750,000 / 3,500,000 = 0.214

Stock D = 500,000 / 3,500,000 = 0.14

To find the weight time beta:

Stock A = (1.20 x 0.307) = 0.368

Stock B = (0.50 x 0.192) = 0.096

Stock C = (1.40 x 0.214) = 0.300

Stock D = (0.75 x 0.14) = 0.105

B portfolio = 0.368 + 0.096 + 0.300 + 0.105 = 0.87

Required market return = 11,00%

Risk free rate = 5.00%

Market risk premium = rMarket - rRF = 6.00%

Portfolio's required return = rRF + b * (RPm) = 5% + 0.87 * (0.06) = 0.1022

11.00 + 0.1022 = 11.1022%