Question

Jill Angel holds a $200,000 portfolio consisting of the following stocks. The portfolio's beta is 0.875.

Stock Investment Beta
A $50,000 0.5
B 50,000 0.8
C 50,000 1
D 50,000 1.2
Total $200,000

If Jill replaces Stock A with another stock, E, which has a beta of 1.50, what will the portfolio's new beta be?

a. 1.40
b. 1.29
c. 0.86
d. 0.75
e. 1.08

Answer 1

The options provided are incorrect. The correct answer is given below

Answer:

New Portfolio beta = 1.125

Explanation:

The portfolio beta is the function of the weighted average of the individual stock betas that form up the portfolio. The formula to calculate the beta of a portfolio is as follows,

Portfolio beta = wA * Beta of A + wB * Beta of B +  ....  +  wN * Beta of N

Where,

• w represents the weight of each stock in the portfolio

New Portfolio beta = 50000/200000 * 0.8  +  50000/200000 * 1  +  

50000/200000 * 1.2  +  50000/200000 * 1.5

New Portfolio beta = 1.125