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?
$\begin{array}{lrl}
\text { Stack }&\text { Amount}&\text { Beta}\
\mathrm{A} & \$ 1,075,000 & 1.20 \
\mathrm{~B} & 675,000 & 0.50 \
\mathrm{C} & 750,000 & 1.40 \
\mathrm{D} & 500.000 & 0.75\
&\$3,000,000&
\end{array}$
A) 10.56%
B) 10.83%
C) 11.11%
D) 11.38%
E) 11.67%

Question

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?
$\begin{array}{lrl}
\text { Stack }&\text { Amount}&\text { Beta}\
 \mathrm{A} & \$ 1,075,000 & 1.20 \
\mathrm{~B} & 675,000 & 0.50 \
\mathrm{C} & 750,000 & 1.40 \
\mathrm{D} & 500.000 & 0.75\
&\$3,000,000&
\end{array}$
A) 10.56%
B) 10.83%
C) 11.11%
D) 11.38%
E) 11.67%

Quizplus · Accepted Answer

$\begin{array}{lclll}
\text { Company } & \text { Amount }&\text { Weight }&\text { Beta }&\text {Wt x Beta }\
\text { Stock A } & \$ 1,075,000 & 0.358 & 1.20 & 0.43 \
\text { Stock B } & 675,000 & 0.225 & 0.50 & 0.11 \
\text { Stock C } & 750,000 & 0.250 & 1.40 & 0.35 \
\text { Stock D } & \underline{500.000} & \underline{0.167} & 0.75 & \underline{0.13}\
&&&&&\text { Intermediate }\
&\$ 3,000,000&1.000&\mathrm{b}_{\text {Portfolio }}=&1.02&\text { step }
\end{array}$
$ \begin{array}{lr}
\text { Required market return } & 11.00 \% \ 
\text { Risk free rate } & \underline{5.00 \%} \ 
\text { Market risk premium }=\mathrm{r}_{\text {Market }}-  \ \mathrm{r}_{\mathrm{RF}}= & 6.00 \% \
\text { Portfolio's required return }=r_{R F}+ & \ 
b\left(R P_{M}\right)= & 11.11 \% 
\end{array} $

Joel Foster Is the Portfolio Manager of the SF Fund