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A mutual fund manager has a $20 million portfolio with a beta of 1.50. The risk-

ID: 2821113 • Letter: A

Question

A mutual fund manager has a $20 million portfolio with a beta of 1.50. The risk-free rate is 3.75%, and the market risk premium is 4.0%. 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 12%. 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* market risk premium

0.12 = 0.0375+ beta * 0.04

Beta = (0.12+0.0375)/ 0.04 =3.94

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