$10.00 million mutual fund Henry manages has a beta of 1.05 and a 9.50% required return The risk-free rate is 4.20% Henry now receives another $5.00 million, which he invests in stocks with an average beta of 0.65 What is the required rate of return on the new portfolio? (Hint: You must first find the market risk premium, then find the new portfolio beta.)
A) 8.83%
B) 9.05%
C) 9.27%
D) 9.51%
E) 9.74%

Question

Quizplus · Accepted Answer

The correct answer is A.The market risk premium is 9.50% - 4.20% = 5.30%. The new portfolio beta is (10.00 / 15.00) * 1.05 + (5.00 / 15.00) * 0.65 = 0.87. The required rate of return on the new portfolio is 4.20% + 0.87 * 5.30% = 8.83%.

$1000 Million Mutual Fund Henry Manages Has a Beta of 1.05