You own a portfolio equally invested in a riskfree asset and

You own a portfolio equally invested in a riskfree asset and two stocks. If one of the stocks has a beta of 1.4 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio? O 0.60 .60 1.68 O 1.52 O 0.65

Solution

Investment weight of each=(1/3)

Portfolio beta=Respective betas*Respective investment weights

1=(1/3*1.4)+(1/3*0)+(1/3*Beta of other stock)(Beta of market =1 while Beta of risk free asset=0)

1=0.467+(1/3*Beta of other stock)

Beta of other stock=(1-0.467)*3

=1.60