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11 April, 02:43

Joel Foster is the portfolio manager of the SF Fund, a $3 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 750,000 1.40

D 500,000 0.75

TOTAL 3,000,000

(A) 10.56%

(B) 10.83%

(C) 11.11%

(D) 11.38%

(E) 11.67%

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Answers (1)
  1. 11 April, 03:03
    0
    (C) 11.11%

    Explanation:

    In this question, we use the Capital Asset Pricing Model formula which is shown below:

    Expected rate of return = Risk-free rate + Beta * (Required rate of return - risk-free rate)

    The beta is not given so first we have to compute it. The calculation is shown below:

    Stock A = (Stock amount : total amount) * Beta

    = ($1,075,000 : $3,000,000) * 1.20

    = 0.3583 * 1.20

    = 0.43

    Stock B = (Stock amount : total amount) * Beta

    = ($675,000 : $3,000,000) * 0.50

    = 0.225 * 0.50

    = 0.1125

    Stock C = (Stock amount : total amount) * Beta

    = ($750,000 : $3,000,000) * 1.40

    = 0.25 * 1.40

    = 0.35

    Stock D = (Stock amount : total amount) * Beta

    = ($500,000 : $3,000,000) * 0.75

    = 0.1667 * 0.75

    = 0.1251

    The total value of beta equals to

    = 0.43 + 0.1125 + 0.35 + 0.1251

    = 1.017

    Now put these values to the above formula

    So, the value would equal to

    = 5% + 1.017 * (11% - 5%)

    = 5% + 6.102%

    = 11.102%
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