Question

Jim Angel holds a $200,000 portfolio consisting of the following stocks: Stock - Investment - Beta A - $ 50,000 - 0.95 B - 50,000 - 0.80 C - 50,000 - 1.00 D - 50,000 - 1.20 Total = $200,000 What is the portfolio's beta?

Answer 1

Answer:

The portfolio's beta is 0.9875.

Explanation:

Beta is a systematic risk. Portfolio beta is weightage average of beta of all investment in the portfolio. It is calculated as below.

As an investment equal to $ 50,000 is made in each of four type of stock. So weightage of 25% (200,000/50,000) will be assign to each stock when calculating entire portfolio beta.

Portfolio Beta = 25% *0.95 + 25% *0.8 + 25%*1 + 25%*1.2

Portfolio Beta = 0.2375 + 0.2 + 0.25 + 0.3

Portfolio Beta = 0.9875

Answer 2

Based on the various amounts invested in the stocks, the portfolio beta will be 0.9875.

One can find the portfolio beta as a weighted average of the various investments in stocks.

The portfolio beta here is:

= ∑( Amount invested in stock/ Total amount invested) x Stock beta

Solving gives:

= ( (50,000 / 200000) x 0.95) + ((50,000 / 200,000 x 0.80) + (50,000 / 200,000 x 1) + (50,000 / 200,000 x 1.20)

= 0.9875

In conclusion, this is 0.9875.

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