You are the fund manager of the Olive Investment Fund, which has a total capital of $ 1 million. You are considering investing these funds in five different stocks, as follows:

stocks	Investment	r^	Beta coefficient
A	$200,000	16%	0,5
B	$300,000	18%	2,0
C	$100,000	20%	3,5
D	$200,000	15%	1,5
E	$200,000	19%	3,0

The risk free rate is 8%, whereas the market has a return of 12%.

1. Compute the fund’s required rate of return for the next period using the CAPM.

2. Suppose John, the president, receives a proposal for a new stock. The investment needed to take a position in the stock is $50 million, it will have an expected return of 22%, and its estimated beta coefficient is 2.1.

1. Should the new stock be made? Explain your answer.

Answer rating: 100% (QA)

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