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?
$\begin{array}{lrl}
\text {Stack}& \text {Amount.}& \text {Beta}\
\mathrm{A} & \$ 1,075,000 & 1.20 \
\mathrm{~B} & 675,000 & 0.50 \
\mathrm{C} & 750,000 & 1.40 \
\mathrm{D} & 500,000 & 0.75\
&\$ 3.000 .000
\end{array}$

Question

Quizplus · Accepted Answer

$\begin{array}{l}
\begin{array} { l } 
\text { Company}\
\text { Stock A}\
\text { Stock B}\
\text { Stock C}\
\text { Stock D}\
\ \
\end{array}
\begin{array} { l } 
\text { Amount }&\text { Weight }\
\$ 1,075,000 & 0.358 \
675,000 & 0.225 \
750,000 & 0.250 \
500.000 & 0.167\
\
\$ 3.000 .000& 1.000 
\end{array}
\begin{array} { l } 
\text { Beta} & \text { Wt $ \times $ beta} \
1.20 & 0.43 \
0.50 & 0.11 \
1.40 & 0.35 \
0.75 & 0.13\
\
\text { b }_{prtfolio}&1.02&\text { Intermediate step }
\end{array}
\end{array}$

$\begin{array}{l}
\begin{array} { l } 
\text { Required market return }\
\text { Risk free rate}\
\text { Market risk premium }={ r}_{\text {Market }}-r_ \mathrm{RF}=\
\
\text { Portfolio's required return }=1 \mathrm{RF}+\mathrm{b}(\mathrm{RPM})=
\end{array}
\begin{array} { l } 
11.00 \% \
5.00 \% \
 6.00 \%\
\
11.11 \% 
\end{array}
\end{array}$

Joel Foster Is the Portfolio Manager of the SF Fund