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Beta and required return

Problem: Suppose you are the money manager of a $4 million investment fund. The fund consists of four stocks with the following betas:

Stock Investment Beta

A $0.4 million 1.5
B $0.6 million (0.50)
C $1.0 million 1.25
D $2.0 million 0.75

If the market required rate of return is 14 percent and the risk-free rate is 6%, what is the funds required return?

Question: Do I calculate the individual securities using the equation? E(Ri) = Rf + Bi(Rm - Rf),

Stock A = 6% + 1.5 (14% - 6%) = 6% + 12% = 18%
Stock B = 6% + -.50 (14% - 6%) = 6% + -4 = 2%
Stock C = 6% + 1.25 (14% - 6%) = 6% + 10% = 16%
Stock D = 6% + 0.75 (14% - 6%) = 6% + 6% = 12%

Next add them together and find the average (mean)?
18% + 2% + 16% + 12% = 48 divided by 4 equals 12%.

I'm not sure how to calculate: "What is the funds required return."

Solution Summary

The solution calculates the required return of a fund using CAPM, given the stocks in the funds, the amounts invested in the stocks and the betas of the stocks.

$2.19