Question [1]. Walter Jasper currently manages a $500,000 portfolio. H

[1]. Walter Jasper currently manages a $500,000 portfolio. He is expecting to receive an additional $250,000 from a new client. The existing portfolio has a required return of 10.75 percent. The risk-free rate is 4 percent and the return on the market is 9 percent. If Walter wants the required return on the new portfolio to be 11.5 percent, what should be the average beta for the new stocks added to the portfolio?

a. 1.50

b. 2.00

c. 1.67

d. 1.35

e. 1.80

[2]. A portfolio manager is holding the following investments in her portfolio:

StockAmount InvestedBeta

1 $300 million 0.7

2 200 million 1.0

3 500 million 1.6

The risk-free rate, k_RF, is 5 percent and the portfolio has a required return of 11.655 percent. The manager is thinking about selling all of her holdings of Stock 3, and instead investing the money in Stock 4, which has a beta of 0.9. If she were to do this, what would be the new portfolio’s required return?

a. 9.73%

b. 11.09%

c. 9.91%

d. 7.81%

e. 10.24%

[3]. A fund manager is holding the following stocks:

StockAmount InvestedBeta

1 $300 million 1.2

2 560 million 1.4

3 320 million 0.7

4 230 million 1.8

The risk-free rate is 5 percent and the market risk premium is also
5 percent. If the manager sells half of her investment in Stock 2 ($280 million) and puts the money in Stock 4, by how many percentage points will her portfolio’s required return increase?

a. 0.36%

b. 0.22%

c. 2.00%

d. 0.20%

e. 0.40%

[4]. 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?

a. 1.40

b. 1.75

c. 2.05

d. 2.40

e. 2.60

[5]. Here are the expected returns on two stocks:

Returns

Probability X Y

0.1 -20% 10%

0.8 20 15

0.1 40 20

If you form a 50-50 portfolio of the two stocks, what is the portfolio’s standard deviation?

a. 8.1%

b. 10.5%

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