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Required Rate of Return on Retirement Fund Assets

The assets of a particular investment fund are:

Stock A with an Investment of $200,000 and a beta of 1.50. Stock B with an Investment of $300,000 and a beta of -0.50. Stock C with an Investment of $500,000 and a beta of 1.25. Stock D with an Investment of $1,000,000 and a beta of 0.75.

The required market rate of return is 15% and the risk-free rate is 7%. What is the required rate of return on the investment fund?

a) 14.3%
b) 15.0%
c) 13.1%
d) 12.7%
e) 10.3%

Solution Preview

Find the beta of the portfolio.

Assuming there are only 4 stocks in the portfolio, the weight of each stock is as follows:

Wa: 200000/2000000 = 0.1
Wb: ...

Solution Summary

The solution clearly shows the steps that are required to calculate the expected rate of return using the CAPM method. Step by step instructions are provided for the student which makes it easy for anyone with a basic understanding of finance to understand the solution. OTA concisely explains the concepts and steps and does a superb job of getting to the right answer.

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