A mutual fund manager has a $20 million portfolio with a beta of 0.95. The risk-
ID: 2810701 • Letter: A
Question
A mutual fund manager has a $20 million portfolio with a beta of 0.95. The risk-free rate is 7.00%, 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 20%. 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
Return rate using the CAPM model = Risk free rate + Beta ( Market premium - risk free rate)
return rate = 7 + 0.95 (-4- 7)
return rate = 7 + (-10.45)
return rate = -3.45 % for the 20 million investment
for the addition 5 mill investment, the required rate is already mentioned as 20%, so the CAPM model would be
20 = 7 + Beta (-4 -7)
20 = 7+ beta (-11)
13= beta (-11)
13/-11 = beta
-1.18 = beta
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