You own a portfolio equally invested in a riskfree asset and

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.95 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

Answers:

a. 0.05

b. 1.05

c. 0.10

d. 1.10

e. 1.00

Solution

1 = 0.5*1.95 + 0.5*beta of the other stock in portfolio

beta of the other stock in portfolio = 0.05