Assume that you are the portfolio manager of the Coastal Fund,a $3 million hedge fund that contains the following stocks.The required rate of return on the market is 14.00% and the risk-free rate is 6.00%.What rate of return should investors expect (and require) on this fund? $\begin{array}{lrr}
& {\text { Amount }} & \text { Beta } \
\hline \text { Stock A } & \$ 1,075,000 & 1.20 \
\text { Stock B } & 675,000 & 0.50 \
\text { Stock C } & 750,000 & 1.40 \
\text { Stock D } & \underline{500,000} & 0.75\
&\$ 3,000,000\
\end{array}$

Question

Assume that you are the portfolio manager of the Coastal Fund,a $3 million hedge fund that contains the following stocks.The required rate of return on the market is 14.00% and the risk-free rate is 6.00%.What rate of return should investors expect (and require) on this fund? $\begin{array}{lrr} 
& {\text { Amount }} & \text { Beta } \
\hline  \text { Stock A } & \$ 1,075,000 & 1.20 \
\text { Stock B } & 675,000 & 0.50 \
\text { Stock C } & 750,000 & 1.40 \
\text { Stock D } & \underline{500,000} & 0.75\
&\$ 3,000,000\
\end{array}$

Quizplus · Accepted Answer

First, we need to calculate the portfolio beta by weighting the individual stock betas by their respective proportions in the portfolio:

Portfolio Beta = (1.20 x $1,075,000 + 0.50 x $675,000 + 1.40 x $750,000 + 0.75 x $500,000) / $3,000,000
Portfolio Beta = 1.025

Next, we can use the Capital Asset Pricing Model (CAPM) to calculate the expected rate of return:

Expected Return = 6.00% + 1.025 x (14.00% - 6.00%)
Expected Return = 14.14%

Therefore, investors should expect (and require) a return of 14.14% on this fund, which is closest to choice C (14.14%).

Assume That You Are the Portfolio Manager of the Coastal