Walter Jasper currently manages a $500,000 portfolio. He is expecting to receive
ID: 2615990 • Letter: W
Question
Walter Jasper currently manages a $500,000 portfolio. He is expecting to receive an additional $250,000 from a new client. The existing portfolio has a required return of 10.75 percent. The risk-free rate is 4 percent and the return on the market is 9 percent. If Walter wants the required return on the new portfolio to be 11.5 percent, what should be the average beta for the new stocks added to the portfolio?
a.
1.50
b.
2.00
c.
1.67
d.
1.35
e.
1.80
Walter Jasper currently manages a $500,000 portfolio. He is expecting to receive an additional $250,000 from a new client. The existing portfolio has a required return of 10.75 percent. The risk-free rate is 4 percent and the return on the market is 9 percent. If Walter wants the required return on the new portfolio to be 11.5 percent, what should be the average beta for the new stocks added to the portfolio?
a.
1.50
b.
2.00
c.
1.67
d.
1.35
e.
1.80
Explanation / Answer
New total portfolio value=(500,000+250,000)=$750,000
Portfolio return=Respective return*Respective weights
11.5=(500000/750,000*10.75)+(250,000/750000*Required return of new stocks)
11.5=7.167+(250,000/750000*Required return of new stocks)
Required return of new stocks=(11.5-7.167)*750,000/250,000
=13%
required return= risk-free rate +Beta*(MArket rate- risk-free rate )
13=4+Beta*(9-4)
Beta=(13-4)/(9-4)
which is equal to
=1.80
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