Question

**PORTFOLIO BETA**

A mutual fund manager has a $20 million portfolio with a beta of 1.50. The risk-free rate is 6.50%, and the market risk premium is 4.5%. 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 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.

Answer #1

Expected return for existing portfolio

As per CAPM |

expected return = risk-free rate + beta * (Market risk premium) |

Expected return% = 6.5 + 1.5 * (4.5) |

Expected return% = 13.25 |

Total New Portfolio value = Value of Existing portfolio + Value of New stocks |

=20+5 |

=25 |

Weight of Existing portfolio = Value of Existing portfolio/Total New Portfolio Value |

= 20/25 |

=0.8 |

Weight of New stocks = Value of New stocks/Total New Portfolio Value |

= 5/25 |

=0.2 |

Expected return of New Portfolio = Weight of Existing portfolio*Expected return of Existing portfolio+Weight of New stocks*Expected return of New stocks |

17 = 13.25*0.8+Expected return of New stocks*0.2 |

Expected return of New stocks = 32 |

As per CAPM |

expected return = risk-free rate + beta * (Market risk premium) |

32 = 6.5 + Beta * (4.5) |

Beta = 5.67 |

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