SOLUTION: 2. A portfolio manager is managing a $10 million portfolio. Currently the portfolio is invested in the following manner: Investment Dollar Amount Invested Beta Stock 1 2 million

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Question 1163021: 2. A portfolio manager is managing a $10 million portfolio. Currently the portfolio is invested in the following manner:
Investment Dollar Amount Invested Beta
Stock 1 2 million 0.6
Stock 2 3 million 0.8
Stock 3 3 million 1.2
Stock 4 2 million 1.4
Currently, the risk-free rate is 5 percent and the portfolio has an expected return of 10 percent. Assume that the market is in equilibrium so that expected returns equal required returns. The manager is willing to take on additional risk and wants to instead earn an expected return of 12 percent on the portfolio. Her plan is to sell Stock 1 and use the proceeds to buy another stock. In order to reach her goal, what should be the beta of the stock that the manager selects to replace Stock 1?

Answer by ikleyn(52856)   (Show Source): You can put this solution on YOUR website!
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