Your portfolio contains Stocks X and Y with the following do

Your portfolio contains Stocks X and Y with the following dollar amount of investments:

Stock

X

Y

Investment

$8,000

$12,000

The portfolio has a beta of 1.0. If you add Stock A into your portfolio with an investment of $20,000, what is the beta of your new portfolio? Stock A\'s beta is 2.0.

Select one:

a. 1.5

b. 1.2

c. 1.4

d. 1.7

e. 0.8

Solution

THE PRESENT INVESTMENT IN X & Y IS 20000 AND PORTFOLIO BETA = 1

NOW ANOTHER 20000 IS INVESTED IN STOCK A, WITH BETA 2

SO TOTAL INVESTMENT = 40000

WEIGHT OF OLD PORTFOLIO IN A NEW PORTFOLIO = 20000/40000 = 0.5

WEIGHT OF STOCK A IN NEW PORTFOLIO = 20000/40000 = 0.5

WEIGHTED BETA = WEIGHT OF OLD PORTFOLIO * BETA OF OLD PORTFOLIO + WEIGHT OF STOCK A * BETA OF STOCK A

WEIGHTED BETA = 0.5*(1.0) + 0.5(2.0) = 1.5

ANSWER : a : 1.5