Problem 1112 Calculating Portfolio Betas LO 3 You own a port

Problem 11-12 Calculating Portfolio Betas [LO 3]

You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.42 and the total portfolio is equally as risky as the market.

Required:

What must the beta be for the other stock in your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

  Beta

Solution

Investment weight of each=(1/3)

Portfolio beta=Respective betas*Respective weights

1=(1.42/3)+(x/3)+(0/3)(Beta of market=1 while beta of other stock=x)

1=0.4733+(x/3)

Hence x=beta of other stock=(1-0.4733)*3

=1.58