Llf Fundamentals Of Financial
15th Edition
ISBN: 9781337395267
Author: Brigham
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Question
Chapter 8, Problem 17P
Summary Introduction
To determine: The average beta of the newly added stocks.
Introduction:
Portfolio beta:
The portfolio beta is a measure of the portfolio’s volatility. It measures how the portfolio moves with the movement in the market. A high portfolio beta shows that securities are more volatile in the price movements while a low beta represents that securities are less volatile in the price movements.
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Suppose that a mutual fund manager has a $20 million portfolio with a beta of 1.7. Also suppose that the risk free rate is 4.5% and the
market risk premium is 5%.
The manager expects to receive an additional $5 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 12%.
For notation, let represent the required return, let RF represent the risk free rate, let b represent the beta of a group of stocks, and
m represent the market return.
According to the video, which equation most closely describes the security market line (SML)?
OT=TRE+bx (M + TRF)
O TRE-6x (rM - TRF)
Or=TRF + TM-TRF
ORF + bx (rM - TRF)
Hint: Recall that the manager wants the new required rate of return for the portfolio to remain at 12%.
Using the equation you just identified, and plugging in the relevant information, yields a beta of the portfolio, after the new stocks have
been added, of…
PORTFOLIO BETA A mutual fund manager has a $20 million portfolio with a beta of 1.5. The risk-free rate is 4.5%, and the market risk premium is 5.5%. The manager expects tO receive an additional $5 million, which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund's required return to be 13%. What should be the average beta of the new stocks added to the portfolio?
Problem 2:
A mutual fund manager has a $40 million portfolio with a beta of 1.00. The risk-free rate is 4.25%, and
the market risk premium is 6.00%. The manager expects to receive an additional $60 million, which she
plans to invest in additional stocks. After investing the additional funds, she wants the fund's required
and expected return to be 13.00%. What must the average beta of the new stocks be to achieve the target
required rate of return?
Chapter 8 Solutions
Llf Fundamentals Of Financial
Ch. 8 - Prob. 1QCh. 8 - Prob. 2QCh. 8 - Prob. 3QCh. 8 - Is it possible to construct a portfolio of...Ch. 8 - Stock A has an expected return of 7%, a standard...Ch. 8 - A stock had a 12% return last year, a year when...Ch. 8 - If investors aversion to risk increased, would the...Ch. 8 - Prob. 8QCh. 8 - In Chapter 7, we saw that if the market interest...Ch. 8 - Prob. 10Q
Ch. 8 - Prob. 11QCh. 8 - EXPECTED RETURN A stocks returns have the...Ch. 8 - PORTFOLIO BETA An individual has 20,000 invested...Ch. 8 - REQUIRED RATE OF RETURN Assume that the risk-free...Ch. 8 - Prob. 4PCh. 8 - BETA AND REQUIRED RATE OF RETURN A stock has a...Ch. 8 - EXPECTED RETURNS Stocks A and B have the following...Ch. 8 - Prob. 7PCh. 8 - BETA COEFFICIENT Given the following; information,...Ch. 8 - REQUIRED RATE OF RETURN Stock R has a beta of 2.0,...Ch. 8 - Prob. 10PCh. 8 - CAPM AND REQUIRED RETURN Calculate the required...Ch. 8 - REQUIRED RATE OF RETURN Suppose rRF = 4%, rM =...Ch. 8 - CAPM, PORTFOLIO RISK, AND RETURN Consider the...Ch. 8 - PORTFOLIO BETA Suppose you held a diversified...Ch. 8 - CAPM AND REQUIRED RETURN HR Industries (HRI) has a...Ch. 8 - Prob. 16PCh. 8 - Prob. 17PCh. 8 - EXPECTED RETURNS Suppose you won the lottery and...Ch. 8 - EVALUATING RISK AND RETURN Stock X has a 10%...Ch. 8 - REALIZED RATES OF RETURN Stocks A and B have the...Ch. 8 - SECURITY MARKET LINE You plan to invest in the...Ch. 8 - Prob. 22SPCh. 8 - Prob. 23ICCh. 8 - Prob. 1TCLCh. 8 - Prob. 2TCLCh. 8 - Prob. 3TCLCh. 8 - Using Past Information to Estimate Required...Ch. 8 - Prob. 5TCLCh. 8 - Prob. 6TCLCh. 8 - Prob. 7TCLCh. 8 - Prob. 8TCL
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