Question

A mutual fund manager has a $20 million portfolio with a beta of 1.3. The risk-free rate is 5.5%, and the market risk premium is 9%. 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? Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to one decimal place. 1.5 3

Answer 1

rate positively ..

Given that -
	Required portfolio return =		19%
	Which means 19% =	5.5%+9%*Beta
	therefore beta =	(19%-5.5%)/9%
		1.50
	Which mean required portfolio beta =			1.50
	Portfolio beta is the sum of weighted average beta to the stocks.
	We know that for 20mil we have beta of 1.3mil
	Therefore for additional 5mil we need to solve the beta
	we have below -
		Value	weight	Beta
		20	0.8	1.3
		5	0.2	x
		25		1.5
	x =	(1.5-1.3*.8)/.2
	x=	2.3
	ans =	2.3