Save A mutual fund manager has a S20 million portfolio with a beta of 1.85 The r

Question

Save A mutual fund manager has a S20 million portfolio with a beta of 1.85 The risk-free rate is 7.50%, 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 12%. 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.

Explanation / Answer

Using CAPM model:

0.12 = 0.075 + b*0.05

Beta of portfolio = 0.9

beta of portfoilio is weighted averge of beta

0.9 = ( 20,000,000 / 25,000,000) * 1.85 + ( 5,000,000 / 25,000,000) * X

0.9 = 0.8 * 1.85 + 0.2 * X

X = -2.9

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