Suppose you are the money manager of a $4.08 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A $ 320,000 1.50 B 540,000 (0.50) C 1,420,000 1.25 D 1,800,000 0.75 If the market's required rate of return is 13% and the risk-free rate is 4%, what is the fund's required rate of return

r fund = 0.11356617647  or  11.356617647%  rounded off to  11.36

Explanation:

The required rate of return on the fund can be calculated using the CAPM equation. The equation is as follows,

r fund = rRF  +  beta *  (rM - rRF)

Where,

To calculate the required rate of return of the fund, we first need to calculate the fund beta. The beta on fund can be calculated using the formula for portfolio beta which is,

Portfolio Beta = wA * Beta of A  +  wB * Beta of B  +  ...  +  wN * Beta of N

Where,

Portfolio or fund beta = 320000/4080000 * 1.5  +  540000/4080000 * -0.5  +  1420000/4080000 * 1.25  +  1800000/4080000 * 0.75

Portfolio or fund beta = 0.81740196078 rounded off to 0.82

The required rate of return on fund will be,

r fund =  4%  +  0.81740196078  *  (13%  -  4%)

r fund = 0.11356617647  or  11.356617647%  rounded off to  11.36

c, theres a double tax on the business earnings