A Mutual Fund Manager Has a $200,000,000 Portfolio with a Beta

Multiple Choice

A mutual fund manager has a $200,000,000 portfolio with a beta = 1.2. Assume that the risk-free rate is 6 percent and that the market risk premium is also 6 percent. The manager expects to receive an additional $50,000,000 in funds soon. She wants to invest these funds in a variety of stocks. After making these additional investments, she wants the fund's expected return to be 13.5 percent. What should be the average beta of the new stocks added to the portfolio?

A) 1.10
B) 1.33
C) 1.45
D) 1.64
E) 1.87