PORTFOLIO BETA A mutual fund manager has a $20 million portfolio with a beta of

Question

PORTFOLIO BETA
A mutual fund manager has a $20 million portfolio with a beta of 1.25. The risk-free rate is 4.75%, and the market risk premium is 7.0%. 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 17%. 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

Solution- Fund Manager will receive return on 20 million is-

Return= Risk free rate +Market risk premium*beta of the portfolio

= 4.75 +7*1.25

=13.5%

Fund Manager wants return on additional fundsis 17% ,then average beta is=

Expected Return= Risk free rate +Market risk premium*beta of the portfolio

17%=4.75% + 7%* Beta of the portfolio

Beta of the portfoilio is 1.75

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