Question

A mutual fund manager has a $20 million portfolio with a beta of 2.7. 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

Rate of return = Risk free rate + beta*market premium

Thus, beta = ( rate of return - risk free rate) / market pemium

= ( 25% - 2.5% ) / 9% = 2.5

Thus the fund shall have a beta of 2.5

Funds weighted average beta = [ ( weight of stock 1 * beta of stock 1) + ( weight of stock 2
* beta of stock 2) ]

Weight of stock 1 = 20 / (20 + 5) = 0.8

Weight of stock 2 = 5 / (20 + 5) = 0.2

thus , 2.5 = [ (0.8 * 2.7) + (0.2 * beta of stock 2) ]

beta of stock 2 = 1.7