Question

eBook A mutual fund manager has a $20 million portfolio with a beta of 1.60. The risk-free rate is 6.00%, and the market risk premium is 6.0%. The manager expects to receive an additional $5 million, which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund's required return to be 19%. What should be the average beta of the new stocks added to the portfolio? Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

Answer #1

return of the existing portfolio using capm = risk free rate + beta*market risk premium

=>6%+1.60*6%

=>15.60%.

amount | weight | return | weight * return | |

exiting stocks | 20 | 20/25=>0.80 | 15.6 | (0.80*15.6)=>12.48 |

new stock | 5 | 5/25=>0.20 | x | (0.20*x)=>0.2x |

total | 12.48+0.2x |

since required return is 19%

=>12.48+0.2x= 19%

=>0.2x =>6.52%.

=>x=32.6%.

so required return on new stocks is 32.6%.

let the beta of the new stocks be y.

=>6% +y*6 =32.6

=>6y=26.6

=>y=4.43.

so beta of new stocks shall be 4.43.

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