Subject: PORTFOLIO BETA
A mutual fund manager has a $20 million portfolio with a beta of 0.75. The risk-free rate is 4.00%, 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 19%. 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.
rate positively ..
required rate of return on existing investment of 20 mil = | |||||||
Risk free rate + market risk premium*beta | 7.750% | ||||||
4%+5%*0.75 | |||||||
Now new investment of 5mil + existing investment will require total return of 19%. | |||||||
Therefore we will have below equation | |||||||
19% = | (20*7.75%+5*x)/25 | ||||||
X= | 64.00% | ||||||
Therefore beta of 5mil should be such that it will generate 64% rate of return | |||||||
Putting this in formula | |||||||
Risk free rate + market risk premium*beta | = | 64.00% | |||||
4%+5%*Beta= | 64.00% | ||||||
Beta= | 12.00 | ||||||
Ans = | 12.00 | ||||||
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