Question

# PORTFOLIO BETA A mutual fund manager has a \$20 million portfolio with a beta of 1.20....

PORTFOLIO BETA

A mutual fund manager has a \$20 million portfolio with a beta of 1.20. The risk-free rate is 5.00%, 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 12%. What should be the average beta of the new stocks added to the portfolio? Do not round intermediate calculations. Round your answer to two decimal places. Enter a negative answer with a minus sign.

 Security return= Risk free return + Beta * (Market return - Security return) 12%= 5% + Beta * 6% Beta * 6%= 7% Beta= 7%/6% Beta= 1.17 So after new investment combined BETA should be 1.17 Fund value Beta Weight Weighted BETA 20 1.2 80% 0.96 5 B 20% 0.20 * B 25 0.96 + 0.20 * B= 1.17 0.20 * B= 0.21 B= 0.21/0.20 B= 1.05 so New investment should be done in portfolio with 1.05 BETA

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