. A money manager is holding the following portfolio:

Stock Amount Invested Beta

1 $400,000 0.5

2 400,000 0.8

3 600,000 1.2

4 600,000 1.6

The risk-free rate is 5 percent and the portfolios required rate of return is 11.6 percent. The manager would like to sell all of her holdings of Stock 2 and use the proceeds to purchase more shares of Stock 3.

1. What is the beta of the current portfolio?
2. What is the beta of the new portfolio?
3. What would be the portfolios required rate of return following this change?