Consider the following information, and then calculate the required rate of return for the Scientific Investment Fund.The total investment in the fund is $2 million.The market required rate of return is 15 percent, and the risk-free rate is 7 percent.
A) 14.3%
B) 15.0%
C) 13.1%
D) 12.7%
E) 10.3%

Question

Consider the following information, and then calculate the required rate of return for the Scientific Investment Fund.The total investment in the fund is $2 million.The market required rate of return is 15 percent, and the risk-free rate is 7 percent. 
A) 14.3% 
B) 15.0% 
C) 13.1% 
D) 12.7% 
E) 10.3%

Quizplus · Accepted Answer

The required rate of return for the Scientific Investment Fund can be calculated using the Capital Asset Pricing Model (CAPM):

Required Rate of Return = Risk-free rate + Beta x (Market return - Risk-free rate)

The beta of the fund is not provided, so we cannot use this formula. However, we can make an assumption that the fund has a beta of 1 (i.e. it has the same level of risk as the overall market). Using this assumption, the required rate of return can be calculated as follows:

Required Rate of Return = Risk-free rate + Beta x (Market return - Risk-free rate)
= 7% + 1 x (15% - 7%)
= 13.0%

Therefore, the best choice is C, 13.1%, which is the closest option to our calculation.

Consider the Following Information, and Then Calculate the Required Rate