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    Beta and required return

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    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."

    © BrainMass Inc. brainmass.com October 9, 2019, 7:53 pm ad1c9bdddf
    https://brainmass.com/business/capital-asset-pricing-model/132680

    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