Question

A mutual fund manager has a $20 million portfolio with a beta of 1.4. The risk-free rate is 5.5%, and the market risk premium is 9%. 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 one decimal place.

Answer 1

  

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Expected Return of old portfolio = Rf + beta * Market Risk Premium

= 5.5% + 1.4 * 9

= 18.1%

Expected Return of new portfolio = 18.10% * 20mn / 25 mn + Return of additional Funds * 5 / 25

19% = 14.48% + Return of additional Funds * 0.20

Return of additional Funds = 19% - 14.48% / 0.20

Return of additional Funds = 22.6%

Return of Additional Funds = Rf + beta * Risk Premium

22.60% = 5.5% + beta * 9

beta = 22.60% - 5.5% / 9

beta = 1.90

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