Question

You invest $1300 in Security L with a beta of 1.7 and $1100 in Security Z with a beta of 0.6. What is the beta of this portfolio?

Answer 1

Given,

Security L investment = $1300

Security L beta = 1.7

Security Z investment = $1100

Security Z beta = 0.6

Solution :-

Total investment = $1300 + $1100 = $2400

Weight of Security L = $1300/$2400 = 0.54166666667

Weight of Security Z = 1 - 0.54166666667 = 0.45833333333

Now,

Beta of the portfolio = (Security L beta x weight of Security L) + (Security Z beta x weight of Security Z)

= (1.7 x 0.54166666667) + (0.6 x 0.45833333333)

= 0.92083333333 + 0.27499999999 = 1.1958 or 1.2