Question

Hazel Morrison, 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%. Hazel 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. 2.04 b. 1.68 c. 1.85 d. 1.76 e. 1.94

Answer 1

Answer:

The average beta of the new stocks would be 1.75 to achieve the target required rate of return

Explanation:

In order to calculate the average beta of the new stocks to achieve the target required rate of return we would have to calculate the following:

average beta of the new stocks = (Required Beta-(portfolio /total fund) *old beta)/(additional portfolio/total fund)

To calculate the Required Beta we would have to use the formula of Required rate of return as follows:

Required rate of return=Risk free return + (market risk premium)*beta

0.13=0.0425+(0.06*Required Beta)

Required Beta = (0.13-0.0425)/0.06

Required Beta = 1.45

Therefore, average beta of the new stocks =(1.45-($40/$100) *1)/($60/$100)

average beta of the new stocks =1.05/0.6

average beta of the new stocks =1.75

The average beta of the new stocks would be 1.75 to achieve the target required rate of return