Question

Problem 8.17: Portfolio Beta A mutual fund manager has a $20 million portfolio with a beta of 0.75. The risk-free rate is 3.25%, and the market risk premium is 5.0%. 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 20%. 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. ANSWER IS NOT 8.95

Answer 1

Answer:

Current Value of Investment = $20 Million
Proposed Value of Investment = $5 Million
Total Value of Investment = $25 Million

Weight of Current Investment = 20 / 25 = 0.80
Weight of Proposed Investment = 5 / 25 = 0.20

Expected Return = Risk Free Rate + Beta * Market Risk Premium
Expected Return on Current Investment = 0.0325 + 0.75 * 0.05
Expected Return on Current Investment = 0.0325 + 0.0375
Expected Return on Current Investment = 0.07 or 7%

Proposed Portfolio Return = 20%
0.20 = (0.80 * 0.07) + (0.20 * Expected Return on Proposed Investment)
0.20 = 0.056 + (0.20 * Expected Return on Proposed Investment)
(0.20 * Expected Return on Proposed Investment) = 3.5714
Expected Return on Proposed Investment = 17.86%

Expected Return = Risk Free Rate + Beta * Market Risk Premium
0.1786 = 0.0325 + Beta * 0.05
0.1461 = Beta * 0.05
Beta = 2.92