A portfolio manager is managing a $10 million portfolio. Currently the portfolio is invested in the following manner:

Investment Dollar Amount Invested Beta

Stock 1 $2 million 0.6

Stock 2 3 million 0.8

Stock 3 3 million 1.2

Stock 4 2 million 1.4

Currently, the risk-free rate is 5% and the portfolio has an expected return of 10%. Assume that the market is in equilibrium, and that the manager is willing to take on additional risk and wants to instead earn an expected return of 12% on the portfolio. Her plan is to sell Stock 1 and use the proceeds to buy another stock. In order to reach her goal, what should be the beta of the stock that the manager selects to replace Stock 1?

a.2.05

b.2.60

c.2.40

d.1.75

e.1.40