Portfolio Required Return

Portfolio Required Return

You are the money manager of a \$10 million investment fund, which consists of four stocks. This fund has the following investments and betas:

If the market’s required rate of return is 12 percent, and the risk-free rate is 4 percent, what is the fund’s required rate of return?

The required rate of return (RRR) is the minimum return an investor will accept for owning a company’s stock, as compensation for a given level of risk associated with holding the stock. The RRR is also used in corporate finance to analyze the profitability of potential investment projects

Bond Valuation

Bond Valuation

You have two bonds in your portfolio. Each bond has a face value of \$1000 and pays an 8 percent annual coupon. Bond X matures in 1 year, and Bond Y matures in 15 years.

1. If the going interest rate is 4 percent, 9 percent, and 14 percent, what will the value of each bond be? Assume Bond X only has one more interest payment to be made at maturity. Assume there are 15 more payments to be made on Bond Y.
2. The longer-term bond’s price varies more than the shorter-term bond‘s price when interest rates change. Explain why.