83 Risk in a Portfoho Context The CAPM Portfoio beta An indi

8-3: Risk in a Portfoho Context: The CAPM Portfoio beta An individual has $10,000 invested in a stock with a beta of 0.3 and another $30,000 invested in a stock with a beta of 1.1. If these are the only two inv portfolio, what is her portfolio\'s beta? Round your answer to two decimal places

Solution

1.

Total investment=(10000+30000)=$40000

Portfolio beta=Respective beta*Respective weights

=(10000/40000*0.3)+(30000/40000*1.1)

=0.9

2.

required return= risk-free rate +Beta*(MArket rate- risk-free rate )

=6.5+1.4*(8-6.5)

=8.60%

3.

Decrease in beta as a result of net sales=(1-0.98)=0.02

Hence decrease/stock=0.02/20

=0.001

Hence new portfolio beta=(2.05-0.001)

=2.049

=2.05(Approx).