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You are presently invested in the Luther Fund,a broad-based mutual fund that invests in stocks and other securities.The Luther Fund has an expected return of 14% and a volatility of 20%.Risk-free Treasury bills are currently offering returns of 4%.You are considering adding a precious metals fund to your current portfolio.The metals fund has an expected return of 10%,a volatility of 30%,and a correlation of -.20 with the Luther Fund.
-The required return on the precious metals fund is closest to:
A)-3%.
B)4%.
C)1%.
D)10%.

Question

Quizplus · Accepted Answer

The required return on the precious metals fund can be calculated using the Capital Asset Pricing Model (CAPM). Given the negative correlation with the Luther Fund, the metals fund provides diversification benefits, which can lower the required return. The negative correlation suggests that the metals fund can reduce overall portfolio risk, thus the required return is lower than the expected return of 10%.

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