Question

8-2 PORTFOLIO BETA An individual has $35,000 invested in a stock with a beta of 0 8 and another $40,000 invested in a stock with a beta of 1 4. If these are the only two investments in her portfolio, what is her portfolio’s beta?

Answer 1

Answer:

The correct answer is 1.12.

Explanation:

According to the scenario, the given data are as follows:

First investment = $35,000

Beta for first investment = 0.8

Second investment = $40,000

Beta for second investment = 1.4

Total portfolio value = $35,000 + $40,000 = $75,000

So, we can calculate her portfolio’s beta by using following formula:

Portfolio beta = Average beta (first stock) + Average beta (second stock)

where, Average beta (first stock) = 0.8 × $35,000 ÷ $75,000

= 0.37

And Average beta (second stock) = 1.4 × $40,000 ÷ $75,000

= 0.75

So, by putting the value, we get

Portfolio beta = 0.37 + 0.75

= 1.12

Hence, The portfolio beta for two investments is 1.12.