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4. You currently hold a portfolio with a market value of $1.5 million and a beta of 0.5. Your portfolio is expected to yield
4. You currently hold a portfolio with a market value of $1.5 million and a beta of 0.5. Your portfolio is expected to yield a rate of return of 9%. Stock A is currently selling at $25 with a next year expected dividend of $1. You expect the price of stock A to reach $28 next year, thus you decide to buy 100,000 shares of stock A. The return on T-bills is 4%. What is the beta of your new portfolio, which consists of the $1.5 million portfolio that you already own and the 100,000 shares of stock A that you are going to purchase? (Hint: first solve for the market risk premium implied by the expected return on your existing portfolio. Then use this information to find out the beta of stock A.)
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