Question

1. Given the following information, determine the beta coefficient for Stock L that is consistent with equilibrium: r^L = 9.5%; r_RF = 2.5%; r_M = 10.5%. Round your answer to two decimal places.

2. You have been managing a $5 million portfolio that has a beta of 1.35 and a required rate of return of 8.075%. The current risk-free rate is 2%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 1.65, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places. %?

3. A mutual fund manager has a $20 million portfolio with a beta of 2.4. The risk-free rate is 2.5%, and the market risk premium is 9%. 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 25%. What should be the average beta of the new stocks added to the portfolio? Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to one decimal place.

Answer 1

1

As per CAPM

expected return = risk-free rate + beta * (expected return on the market - risk-free rate)

9.5 = 2.5 + Beta * (10.5 - 2.5)

Beta = 0.88

2

Total New portfolio value = Value of Old portfolio + Value of additional inv

=5000000+500000

=5500000

Weight of Old portfolio = Value of Old portfolio/Total New portfolio Value

= 5000000/5500000

=0.9091

Weight of additional inv = Value of additional inv/Total New portfolio Value

= 500000/5500000

=0.0909

Beta of New portfolio = Weight of Old portfolio*Beta of Old portfolio+Weight of additional inv*Beta of additional inv

Beta of New portfolio = 1.35*0.9091+1.65*0.0909

Beta of New portfolio = 1.3773

As per CAPM

expected return = risk-free rate + beta * (expected return on the market - risk-free rate)

8.075 = 2 + 1.35 * (Market return% - 2)

Market return% = 6.5

As per CAPM

expected return = risk-free rate + beta * (expected return on the market - risk-free rate)

Expected return% = 2 + 1.3773 * (6.5 - 2)

Expected return% = 8.2

Please ask remaining parts seperately, questions are unrelated, I have done one bonus