Hazel morrison, 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%. hazel 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?

average beta of the new stocks to achieve the target required rate of return is 2.29

Explanation:

given data

Portfolio amount invested = $40,000,000

Beta = 1  

Risk free rate = 4.25%

Market risk premium = 6%

Hazel expects = $60 million

expected return new investments = 13.00%

to find out

average beta of new stocks be to achieve the target required rate of return

solution

we will use here CAPM formula that is  

Expected return = Risk free rate + Beta × Market risk premium    .........1

put here value we get  

13% = 4.25% + Beta × 6%

0.06 × Beta = 13% - 4.25%

Beta = 1.458

now we get Weighted beta that is express as

Weighted beta = weight of old stock in new portfolio × 1 + Weight of new stock in new portfolio × beta of new stock    ..................2

put here value we get

1.458 =

solve it we get

beta = 2.29

so that average beta of the new stocks to achieve the target required rate of return is 2.29

a.   is the correct choice.

good luck. : )