Question

Investor Corporation has a $175,000 stock portfolio. $60,000 is invested in a stock with a beta of 1.35 and the remainder is invested in a stock with a beta of 2.45. These are the only two investments in the portfolio. What is the portfolio’s beta? Enter your answer rounded to two decimal places. For example, if your answer is 12.345 then enter as 12.35 in the answer box.

Answer 1

Given about Investor Corporation's portfolio,

total investment = $175000

investment in stock A = $60000

beta of stock A, Ba = 1.35

Weight of stock A, Wa = investment in stock A/total investment = 60000/175000 = 0.3429 or 34.29%

Investment in stock B = 175000 - 60000 = $115000

Beta of stock B, Wb = 2.45

So, Weight of stock B, Wb = investment in stock B/total investment = 115000/175000 = 0.6571 or 65.71%

Portfolio's beta is weighted average beta of its assets,

=> Portfolio's beta = Wa*Ba + Wb*Bb = 0.3429*1.35 + 0.6571*2.45 = 2.07

So, portfolio's beta = 2.07