A fund manager is holding the following stocks: Stock Amount Invested Beta 1 $300 million 1.2 2 560 million 1.4 3 320 million 0.7 4 230 million 1.8 The risk-free rate is 5 percent and the market risk premium is also 5 percent. If the manager sells half of her investment in Stock 2 ($280 million) and puts the money in Stock 4, by how many percentage points will her portfolio’s required return increase? Group of answer choices 2.00% 0.4% 0.2% 0.22%
1. A fund manager is holding the following stocks:
|
Stock |
Amount Invested |
Beta |
|
1 |
$300 million |
1.2 |
|
2 |
560 million |
1.4 |
|
3 |
320 million |
0.7 |
|
4 |
230 million |
1.8 |
The risk-free rate is 5 percent and the market risk premium is also 5 percent. If the manager sells half of her investment in Stock 2 ($280 million) and puts the money in Stock 4, by how many percentage points will her portfolio’s required return increase?
- Current long-term government securities carry a yield of 6.5% which includes an inflation premium of 1.25%
- Based on the credit rating of AlphaGet of BAA, the estimated credit spread of AlphaGet is at 2.5%
- Utilizing the work of an external expert, beta of AlphaGet is estimated at +1.5 for marginal investors
- Diversified investors in the market is currently demanding a 2.0% premium over government securities
The following are the current instruments issued by AlphaGet:
- Bond A carries a 5-year tenor and will mature in 3 years with a face value of Php250,000 carrying a coupon of 9.0%
- Bond B carries a 10-year tenor and will mature in 5 years with a face value of Php500,000 carrying a coupon of 8.5%
- Bond C carries a 5-year tenor and was just recently issued with a face value of Php500,000 carrying a coupon of 10.0%
AlphaGet had historically paid dividends out at a rate of 10% of its net income. Dividends paid out this year amounted to Php120.00 per share and is expected to grow by 5% per year over the next 5 years before stabilizing at 3.5% perpetually after year five.
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