A mutual fund manager has a $40 million portfolio with a beta of 1.00.The risk-free rate is 4.25%,and the market risk premium is 6.00%.The manager expects to receive an additional $60 million which she plans to invest in additional stocks.After investing the additional funds,she wants the fund's required and expected return to be 13.00%.What must the average beta of the new stocks be to achieve the target required rate of return?
A)1.68
B)1.76
C)1.85
D)1.94
E)2.04

Question

Quizplus · Accepted Answer

To find the average beta of the new stocks, use the Capital Asset Pricing Model (CAPM): Required return = Risk-free rate + Beta * Market risk premium. The target return is 13%, so 13% = 4.25% + Beta * 6%. Solving for Beta gives 1.4583. The portfolio's current beta is 1.00, and the new portfolio will be a weighted average of the current and new investments. Solving the equation 1.00 * (40/100) + Beta_new * (60/100) = 1.4583 gives Beta_new = 1.76.

A Mutual Fund Manager Has a $40 Million Portfolio with a Beta