A mutual fund manager has a $20 million portfolio with a beta of 0.95. The risk-

Question

A mutual fund manager has a $20 million portfolio with a beta of 0.95. The risk-free rate is 4.25%, and the market risk premium is 5.5%. 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 13%. What should be the average beta of the new stocks added to the portfolio? Round your answer to two decimal places. Problem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-Through

Explanation / Answer

As per CAPM,

Ke = Rf+Beta(Rm)

13% = 4.25%+Beta(5.5%)

Beta = 13-4.25/5.5

Beta = 1.6

1.6 = 0.8(0.95)+0.2(x)

0.2x = 1.6-0.76

X = 4.2

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