Question

Your investment club has only two stocks in its portfolio. $50,000 is invested in a stock with a beta of 0.9, and $75,000 is invested in a stock with a beta of 1.7. What is the portfolio's beta? Do not round intermediate calculations. Round your answer to two decimal places.

Answer #1

Portfolio beta is the weighted average of betas of the stocks of the portfolio

= Sum of ( Weight of stocks x Respective Betas )

= Weight of Stock A x Beta of Stock A + Weight of Stock B x Beta of Stock B

Total value of given portfolio

= Value of Stock A + Value of Stock B

= $50,000 + $75,000

= $125,000

So, Weight of Stock A

= Value of Stock A / Total value of portfolio

= $50,000 / $125,000

= 0.40

Similarly, weight of Stock B

= $75,000 / $125,000

= 0.60

So, Weighted average Beta of the portfolio

= 0.40 x 0.90 + 0.60 x 1.7

= 0.36 + 1.02

= 1.38

So, the weighted average beta of the portfolio is 1.38

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