Capital Planning Techniques

One to Two pages and an Excel Spreadsheet!

You have been asked by the director of finance to put together a plan to invest in other companies. Your plan will manage a mutual fund with a $20 million portfolio with a beta of 1.50. Assume that the risk-free rate is 4.50%, and the market risk premium is 5.50%. You expect to receive an additional $5 million, which you plan to invest in a number of stocks. After investing the additional funds, you want the fund’s required return to be 13%.

  • What must the average beta of the new stocks added to the portfolio be to achieve the desired required rate of return? Attach your Excel file showing your calculations.
  • In a Word document, explain the steps you used to arrive at your answers.
  • What does your calculated beta mean to UPC?
  • Should UPC be concerned about the use of betas in making investment decisions?