uppose 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%. he 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 mese 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 rg represent the risk free rate, let b represent the beta of a group of stocks, and mrepresent the market return. According to the video, which equation most closely describes the security market line (SML)? Or TRE+bx (TM + TRF) OT TRF-bx (TM - TRF) Or = TRF + b TM-TRF Or=RF + 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 approximately True or False: The beta for the portfolio after the stocks have been added is the weighted average of the beta before the stocks where added and the beta of the new stocks that are being added (weighted as a percentage of the total funds invested). O True O False 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
uppose 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%. he 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 mese 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 rg represent the risk free rate, let b represent the beta of a group of stocks, and mrepresent the market return. According to the video, which equation most closely describes the security market line (SML)? Or TRE+bx (TM + TRF) OT TRF-bx (TM - TRF) Or = TRF + b TM-TRF Or=RF + 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 approximately True or False: The beta for the portfolio after the stocks have been added is the weighted average of the beta before the stocks where added and the beta of the new stocks that are being added (weighted as a percentage of the total funds invested). O True O False 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
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text: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 approximately
True or False: The beta for the portfolio after the stocks have been added is the weighted average of the beta before the stocks where
added and the beta of the new stocks that are being added (weighted as a percentage of the total funds invested).
True
False
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
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 6 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education