Assume that the risk-free rate is 5.5% and the market risk premium is

Assume that the risk-free rate is 5.5% and the market risk premium is 6%. A portfolio manager has $10 million invested in a two-asset portfolio that has an (equilibrium) expected return of 12%.

The manager plans to sell $3 million of Stock A with a beta of 1.6. She plans to reinvest this $3 million into Stock B that has a weight of 0.70. What is the (equilibrium) expected return of her new portfolio?
A) 8.28%
B) 10.38%
C) 10.52%
D) 10.90%
E) 11.31%

ANSWER

B