The $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.)

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Business

Deshawn Stout

12 April, 20:12

The $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.)

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Olive Avila · Answer 1

8.83%

Explanation:

Market risk premium = (required return - risk-free rate) : Beta

= (9.5% - 4.2%) : 1.05

= 5.048%

Beta of portfolio:

= (Mutual fund : Total of MF) * Beta + (New investment : Total of MF) * Average beta

= (10 : 15) * 1.05 + (5 : 15) * 0.65

= 0.9167

Required return:

= Risk-free rate + Beta of portfolio * Market risk premium

= 4.2% + 0.9167 * 5.048%

= 8.83%