A portfolio manager is managing a portfolio which is invested in the following manner:
Investment Dollar Amount Invested Beta
Stock 1 $1 million 0.4
Stock 2 2 million 0.8
Stock 3 3 million 1.4
Stock 4 4 million 1.7
Currently, the market risk premium is 5 percent and the portfolio has an expected return of 13 percent. Assume that the market is in equilibrium so that expected returns equal required returns. The manager wants to reduce the risk of the portfolio and wants to earn an expected return of 10.5 percent on the portfolio. Her plan is to sell Stock 3 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 3?
A portfolio manager is managing a portfolio which is invested in the following manner:
Investment Dollar Amount Invested Beta
Stock 1 $1 million 0.4
Stock 2 2 million 0.8
Stock 3 3 million 1.4
Stock 4 4 million 1.7
Currently, the market risk premium is 5 percent and the portfolio has an expected return of 13 percent. Assume that the market is in equilibrium so that expected returns equal required returns. The manager wants to reduce the risk of the portfolio and wants to earn an expected return of 10.5 percent on the portfolio. Her plan is to sell Stock 3 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 3?
Related questions
Selena invests the following sum of money in common stock having expected returns as follows:
| Common Stock | Amount Invested in $ | Expected Return | Beta of Stock β |
| WOOPS | 5,000 | 0.14 | 0.6 |
| KBOOM | 10,000 | 0.16 | 0.8 |
| JUDY | 6,000 | 0.17 | 0.85 |
| UPDWN | 8,000 | 0.13 | 0.5 |
| SPROUT | 4,500 | 0.20 | 1.1 |
| RINGG | 7,500 | 0.15 | 0.65 |
| EIEIO | 9,000 | 0.18 | 0.9 |
a) What is the expected return on her portfolio based on the amount invested above?
b) Calculate the systematic risk, β of the portfolio.
c) Does the portfolio have more or less systematic risk compared to the average market portfolio?
d) If return on the market (Rm) is 14% and the risk free rate (Rf) is 4%, what would be the return of the portfolio according to Capital Asset Pricing Model (CAPM)?
e) If Selena wants to get 12% return from this portfolio, is this the appropriate portfolio for her? Explain your reason using your answer in (A) and (D).
f) If she still wants to invest in this portfolio, what should she do in terms of adjusting the weight of the stock? Give your answer based on the amount invested in UPDWN and SPROUT stocks.
