question archive Calculate the required rate of return for the Wagner Assets Management Group, which holds 4 stocks
Calculate the required rate of return for the Wagner Assets Management Group, which holds 4 stocks
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Calculate the required rate of return for the Wagner Assets Management Group, which holds 4 stocks. The market's required rate of return is 15.0%, the risk-free rate is 7.0%, and the Fund's assets are as follows:
|
Stock |
Investment |
Beta |
|
A |
$ 200,000 |
1.50 |
|
B |
300,000 |
-0.50 |
|
C |
500,000 |
1.25 |
|
D |
1,000,000 |
0.75 |
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Answer as follows:
Step 1: Calculate Portfolio Beta
Portfolio Beta = Beta of Stock A*Weight of Stock A + Beta of Stock B*Weight of Stock B + Beta of Stock C*Weight of Stock C + Beta of Stock D*Weight of Stock D = 1.50*200000/(200000 + 300000 + 500000 + 1000000) -.50*300000/(200000 + 300000 + 500000 + 1000000) + 1.25*500000/(200000 + 300000 + 500000 + 1000000) + .75*1000000/(200000 + 300000 + 500000 + 1000000) = .7625
Step 2: Calculate Required Rate of Return
Required Rate of Return = Risk Free Rate + Beta*(Market Rate of Return - Risk Free Rate) = 7 + .7625*(15 - 7) = 13.10%
Answer is 13.10%.
