Question

Subject: PORTFOLIO BETA

A mutual fund manager has a $20 million portfolio with a beta of 0.75. The risk-free rate is 4.00%, and the market risk premium is 5.0%. 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 19%. 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 1

rate positively ..

required rate of return on existing investment of 20 mil =
Risk free rate + market risk premium*beta		7.750%
4%+5%*0.75
Now new investment of 5mil + existing investment will require total return of 19%.
Therefore we will have below equation
19% =	(20*7.75%+5*x)/25
X=	64.00%
Therefore beta of 5mil should be such that it will generate 64% rate of return
Putting this in formula
Risk free rate + market risk premium*beta	=	64.00%
4%+5%*Beta=				64.00%
Beta=					12.00
Ans =					12.00