Question

# You are considering the construction of a portfolio comprised of equal investments in each of four...

You are considering the construction of a portfolio comprised of equal investments in each of four different stocks. The betas for each stock are found​ below:

 Asset Beta A 2.00 B 1.05 C 0.55 D −1.70

a.  What is the portfolio beta for your proposed investment​ portfolio?

b.  How would a 25 percent increase in the expected return on the market impact the expected return of your​ portfolio?

c.  How would a 25 percent decrease in the expected return on the market impact the expected return on each​ asset?

d.  If you are interested in decreasing the beta of your portfolio by changing your portfolio allocation in two​ stocks, which stock would you decrease and which would you​ increase? ​ Why?

#### Homework Answers

Answer #1

Portfolio beta is equal to weighted average beta

= 2*1/4 + 1.05*1/4 + 0.55*1/4 -1.70*1/4

= 0.475

b.Expected return on portfolio will increase by Portfolio Beta*% increase in market return

= 0.475*25%

= 11.875%

c. Return on Asset A will decrease by 2*25% = 50%

Return on Asset B will decrease by 1.05*25% = 26.25%

Return on Asset C will decrease by 0.55*25% = 13.75%

Return on Asset A will INCREASE by 1.7*25% = 42.50%

Portfolio return will decrease by 11.875%

d. Stock A would be decreased as it has highest beta

and Stock D would be would be increased as it has the lowest beta

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