Question: Suppose that a mutual fund manager has a $6 million portfolio with a beta of 2. Also suppose that the risk free rate is 3%

Suppose that a mutual fund manager has a $6 million portfolio with a beta of 2. Also suppose that the risk free rate is 3% and the market risk premium is 3%.

The manager expects to receive an additional $4 million, which is to be invested in a number of new stocks to add to the portfolio. After these stocks are added, the manager would like the fund’s required rate of return to be 8.4%.

For notation, let r represent the required return, let rRF represent the risk free rate, let b represent the beta of a group of stocks, and rm represent the market return.

If the required rate of return is to remain at 8.4%, the beta of the portfolio, after the new stocks have been added, must be_____.

The beta of the portfolio after the stocks have been added (which you just calculated), along with the new total amount of funds invested, implies that the beta of the stocks added to the portfolio must be_____.

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