Question

A mutual fund manager has a $20 million portfolio with a beta of 1.4. The risk-free rate is 4.5%, and the market risk premium is 5%. 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? 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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Answer:

Let the required return of new investment be x

Let the beta of new investment be B

Weightage of old investment = 20/25 =0.8

Weightage of new investment = 5/25 =0.2

Target Return = Return of old investment * weightage of old+Return of new investment * weightage of new investment

Return of old investment = 4.5 + 1.4(5) =11.5%

Target Return = 11.5 * 0.8 + x*0.2

12= 9.2 + 0.2x

x = 2.8/0.2

x = 14

=> 14= 4.5 + b(5)

b= 1.9