Assume that the risk-free rate is 5.5 percent and the market risk premium is 6 percent.

| September 28, 2018

Assume that the risk-free rate is 5.5 percent and the market risk premium is 6 percent. A money manager has $10 million invested in a portfolio that has a required return of 12 percent. The manager plans to sell $3 million of stock with a beta of 1.6 that is part of the portfolio. She plans to reinvest this $3 million into another stock that has a beta of 0.7. If she goes ahead with this planned transaction, what will be the required return of her new portfolio?(Hint: What is the portfolio’s current beta? What is the beta of the remaining stocks in the portfolio?)

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