The Money Tree Investment Fund has a total investment of $450 million in five stocks:

Stock Investment ($ Millions) Beta

1 130 0.4x

2 110 1.5x

3 70 3.0x

4 90 2.0x

5 50 1.0x

Required

a) What is the funds overall Beta?

b) If the required return on the portfolio is 20.76% and the return on the market is 18%, what must be the risk-free rate?

Part 2 (4 marks)

The Money Tree Investment Fund is considering adding a new $30 million investment, White Inc. shares, to the list in Part 1. White Inc. has just paid a dividend, D0, of $1.50 per share, with an expected constant growth rate of 2%. Currently the market price is $88.00 per share. The firms stock is twice as volatile as the market. The average market return is 8% and the yield on government securities is 3%. What is your recommendation? (Show supporting calculations.)