Suppose you are the money manager of a $4.86million investment fund. The fund consists of fourstocks with the following investments and betas:StockInvestmentBetaA$ 280,0001.50В700,000(0.50)1,380,0001.252,500,0000.75If the market's required rate of return is 11% andthe risk-free rate is 6%, what is the fund's requiredrate of return? Do not round intermediatecalculations. Round your answer to two decimalplaces.22.65%

Market return = 11% Risk free rate = 6%

Answered: Suppose you are the money manager of a…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose that a mutual fund manager has a $20 million portfolio with a beta of 1.7. Also suppose that the risk free rate is 4.5% and the market risk premium is 5%. The manager expects to receive an additional $5 million, which is to be invested in a number of new stocks to add to the portfolio. After these stocks are added, the manager would like the fund's required rate of return to be 12%. For notation, let represent the required return, let RF represent the risk free rate, let b represent the beta of a group of stocks, and m represent the market return. According to the video, which equation most closely describes the security market line (SML)? OT=TRE+bx (M + TRF) O TRE-6x (rM - TRF) Or=TRF + TM-TRF ORF + bx (rM - TRF) Hint: Recall that the manager wants the new required rate of return for the portfolio to remain at 12%. Using the equation you just identified, and plugging in the relevant information, yields a beta of the portfolio, after the new stocks have been added, of…
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