PORTFOLIO BETA The manager A mutual fund manager has a $20 million portfolio wit

Question

PORTFOLIO BETA The manager A mutual fund manager has a $20 million portfolio with a beta of 1.95. The risk-free rate is 7.75%, 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 14%. 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. answer to two dec mal places. Enter an bethe average beta ofthenewstock barofstocks. After investingthe

Explanation / Answer

Required return on current MF = 7.75 + 1.95*4.5 = 16.525%

Required return on New MF = 14%

Total asset = $25 million

Compute average return on new stocks

14 = (20/25)* 16.525 + (5/25)*r

14 = (4/5)* 16.525 + (1/5)*r

70 = 66.10 + r; r = 3.90%

Using CAPM, 3.90 = 7.75 + beta*4.5

Beta = (3.90 – 7.75)/4.5 = -0.855556

Average beta of newly added stock = -0.86

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