A mutual fund manager has a $20 million portfolio with a beta of 1.20. The risk-free rate is 7.00%, and the market risk premium is 6.0%. The manager expects to receive an additional $5 million, which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund's required return to be 20%. What should be the average beta of the new stocks added to the portfolio

Beta of new stock = 6.03333333335 rounded off to 6.03

Explanation:

We first need to calculate the required rate of return of the current portfolio of $20 million. We can calculate the required rate of return using the CAPM.

r = rRF  +  Beta   *  rpM

Where,

r of existing portfolio = 7%  +  1.2  *  6%

r of existing portfolio = 14.2%

Using the CAPM, we need to determine the overall Beta of a portfolio whose required rate of return should be 20%. Plugging in the value for required rate of return, risk free rate and market risk premium in the CAPM equation, we calculate the overall beta to be,

20%  =  7%  +  Beta * 6%

20% - 7%  =  Beta  *  6%

13% / 6%  =  Beta

Beta = 2.16666666667 rounded off to 2.17

So the new portfolio should have a beta of 2.16666666667 n order to earn a required return of 20%.

Using the formula for portfolio beta, we can calculate the beta of the new stocks to be,

Portfolio Beta = wA * Beta of A  +  wB * Beta of B  +  ...  +  wN *  Beta of N

Where,

Total investment in new portfolio = 20 + 5  =  $25 million

2.16666666667  =  20/25  *  1.2  +  5/25  *  Beta of new stocks

2.16666666667 = 0.96  +  0.2  *  Beta of new stocks

2.16666666667  -  0.96  =  0.2  *  Beta of new stocks

1.20666666667  /  0.2  =  Beta of new stocks

Beta of new stock = 6.03333333335 rounded off to 6.03

both are integral parts of a corporate balance sheet. the cash flow statement, or statement of cash flows, measures the sources of a company's cash and its uses of cash over a specific time period. the income statement measures a company's financial performance, such as revenues, expenses, profits or losses over a specific time period (in fact, it's sometimes called a statement of financial performance).

a cash flow statement shows exactly how much money a company has received and how much it has spent, traditionally over a period of one month. it captures the current operating results and changes on the balance sheet, such as increases or decreases in accounts receivable or accounts payable, and does not include noncash accounting items such as depreciation and amortization. the cash flow generally comes from revenue received as a result of business activity, but it may be augmented by funds available as a result of credit. a cash flow statement is used to determine the short-term viability and liquidity of a company, specifically how well it is positioned to pay its bills and vendors.

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