A mutual fund manager has a $20 million portfolio with a beta of 0.70. The risk-

Question

A mutual fund manager has a $20 million portfolio with a beta of 0.70. The risk-free rate is 4.75%, and the market risk premium is 4.5%. 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 18%. 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

Required return=Risk free rate+Beta of overall portfolio*Market risk premium

18=4.75+4.5*beta of overall portfolio

beta of overall portfolio=(18-4.75)/4.5=2.944%(Approx)

OVerall beta=Respective betas*Respective investment weights

2.944=(20/25*0.7)+(5/25*Beta of new stocks)

Hence Beta of new stocks=[2.944-0.56]*(25/5)

=11.92(Approx)

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