Hazel Morrison, a mutual fund manager, has a $40 million portfolio with a beta of 1.00. The risk-free rate is 4.25%, and the market risk premium is 6.00%. Hazel expects to receive an additional $60 million, which she plans to invest in additional stocks. After investing the additional funds, she wants the fund's required and expected return to be 13.00%. What must the average beta of the new stocks be to achieve the target required rate of return? a. 2.04 b. 1.68 c. 1.85 d. 1.76 e. 1.94

The average beta of the new stocks would be 1.75 to achieve the target required rate of return

Explanation:

In order to calculate the average beta of the new stocks to achieve the target required rate of return we would have to calculate the following:

average beta of the new stocks = (Required Beta - (portfolio / total fund) * old beta) / (additional portfolio/total fund)

To calculate the Required Beta we would have to use the formula of Required rate of return as follows:

Required rate of return=Risk free return + (market risk premium) * beta

0.13=0.0425 + (0.06*Required Beta)

Required Beta = (0.13-0.0425) / 0.06

Required Beta = 1.45

Therefore, average beta of the new stocks = (1.45 - ($40/$100) * 1) / ($60/$100)

average beta of the new stocks = 1.05/0.6

average beta of the new stocks = 1.75

The average beta of the new stocks would be 1.75 to achieve the target required rate of return