Question

PORTFOLIO BETA

A mutual fund manager has a $20 million portfolio with a beta of 2.00. The risk-free rate is 7.50%, and the market risk premium is 6.5%. 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 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.

Answer 1

New required return = Risk free rate + beta of portfolio * (market risk - risk free rate)

=>

19% = 7.5% + beta * 6.5%

=>

beta of portfolio = 1.76923

value of portfolio = 25 million

weighted average beta of portfolio = 1.76923

=>

(20/25) * 2 + (5/25) * new stock beta = 1.76923

=>

new stock beta = 0.85