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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