Problem:
A mutual fund manager expects her portfolio to earn a rate of return of 8% this year. The beta of her portfolio is .8. Assume rate of return available on risk-free assets is 6% and you expect the rate of return on the market portfolio to be 16%.
Required:
Question 1: Calculate the expected rate of return that investors will demand of the portfolio.
Question 2: Should you invest in this mutual fund?
Note: Show supporting computations in good form.