4. Amutual fund manager has a $20.0 million portfolio with a beta of1.50. The ri

Question

4. Amutual fund manager has a $20.0 million portfolio with a beta of1.50. The risk-free rate is 4.50%, and the market risk premium is5.50%. The manager expects to receive an additional $5.0million which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund’srequired return to be 13.00%. What must the average beta ofthe new stocks added to the portfolio be to achieve the desiredrequired rate of return? (Points: 4)
      1.12
       1.26
       1.37
       1.59
       1.73

Explanation / Answer

Mutual fund manager’s total Portfolio value =$20,000,000

Beta of the $20,000,000 Portfolio = 1.50

Risk-free rate = 4.50%

Market Risk Premium (MRP) = 5.50%

Additional funds = $5,000,000

Desired required return = 13%

Calculating Average beta of the New Stocks:

Required rate of return[RNew] = Rf + (RM -Rf)

13% = 4.50% + 5.50% (ß)

13% - 4.50% = 5.50% (ß)

8.50% =   5.50% (ß)

Beta (ß) = 8.50% / 5.50%

Beta (ß) = 1.5455

($20,000,000 / $25,000,000) 1.50 + ($5,000,000 /$25,000,000) = 1.5455

1.20 + 0.2 = 1.5455

0.2 = 1.5455 – 1.20

0.2 = 0.3455

1.7275 (or) 1.73

Average beta of the New Stocks = 1.73

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.