Question

29. A mutual fund manager has a $40.00 million portfolio with a beta of 1.00. The risk-free rate is 4.25%, and the market risk premium is 6.00%. The manager expects to receive an additional $29.50 million which she plans to invest in additional stocks. After investing the additional funds, she wants the fund's required and expected return to be 13.00%. What must the average beta of the new stocks be to achieve the target required rate of return? Do not round your intermediate calculations.

	a.	2.08
	b.	2.18
	c.	2.60
	d.	1.66
	e.	1.87

Answer 1

Expected ret = Rf + Beta ( Market risk Premium )

13% = 4.25% + Portfolio Beta ( 6%)

Portfolio Beta = [ 13% - 4.25% ] / 6%

= 8.75% / 6%

= 1.46

Portfolio Beta is weighted Avg Beta of Securities in that Portfolio.

Particulars	Weight	Beta	Wtd Beta
Portfolio 1	0.57554	1	0.5755
Additional Funds	0.42446	X	0.4245 X
Portfolio Beta			0.4245X + 0.5755

Thus 0.4245X + 0.5755 = 1.46

0.4245X = 1.46 - 0.5755

= 0.8845

X = 0.8845 / 0.4245

2.08

Beta of Additional funds is 2.08

option A is correct.