Problem:
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.
Task:
Question: 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?)
Note: Provide support for rationale.