ASSIGNMENT SESSION 4
QUESTION 1.
Assume that you are 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?
Stock
A
B
C
D
Amount
$1,075,000
675,000
750,000
500,000
$3,000,000
Beta
1.20
0.50
1.40
0.75
QUESTION 2.
A mutual fund manager has a $40 million portfolio with a beta of 1.00. The risk-free rate is
4.25%, and the market risk premium is 6.00%. The manager expects to receive an additional
$60 million which she plans to invest in additional stocks. After investing the additional
funds, she wants the fund’s required and expected return to be 13.00%. What must the
average beta of the new stocks be to achieve the target required rate of return?