Question

A.)

A mutual fund manager has a $20 million portfolio with a beta of 1.50. The risk-free rate is 4.00%, and the market risk premium is 7.0%. 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 17%. 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.

B.)

Beale Manufacturing Company has a beta of 2.3, and Foley Industries has a beta of 0.35. The required return on an index fund that holds the entire stock market is 10.5%. The risk-free rate of interest is 5.5%. By how much does Beale's required return exceed Foley's required return? Round your answer to two decimal places.

C.)

You have been managing a $5 million portfolio that has a beta of 0.75 and a required rate of return of 12%. The current risk-free rate is 3.50%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 0.70, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places.

D.)

Investment X has a 25% chance of producing a 20% return, a 50% chance of producing a 15% return, and a 25% chance of producing a return of -5%. What is X's expected return?

Answer 1

Answer (A)

Let beta of the portfolio after investing $5 million be X

Required rate of return= Risk free rate of return(Rf) + Market Risk Premium (Rm-Rf)*Beta

17= 4+(7*X)

X = 1.86

Answer (B)

Required rate of return of Baele = Rf+ (Rm-Rf)Beta

= 5.5+(10.5-5.5)2.3

= 17%

Required rate of return for Foley industries

= 5.5+(10.5-5.5)0.35

= 7.25%

Required rate of return of Baele Exceeds by (17-7.25) = 9.75% from Foley Industries

Answer (C)

Required rate of return of current portfolio = 12%

12= Rf+ (Rm-Rf)Beta

12 = 3.5+ (Rm-3.5)0.75

Rm(Rate of return of market) = 14.83%

Required rate of return of new portfolio

= 3.5+(14.83-3.5)0.70

= 11.43%

Answer (D)

Calculation of expected return i.e. E(R)

E(R) = Return*Probability+Return*Probability+...............................

(20*25%)+(15*50%)+(-5*25%)

= 5+7.5-1.25

= 11.25%