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#5 Bob owns a portfolio that is one-third invested in a risk-free asset, one-third invested in...

#5

Bob owns a portfolio that is one-third invested in a risk-free asset, one-third invested in Stock A and one-third invested in Stock B. Stock A has a beta of 1.09 and the total portfolio is equally as risky as the market. What must the beta be for Stock B? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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Answer #1

The beta of stock B is computed as shown below:

Beta of portfolio = Beta of risk free asset x weight of risk free asset + Beta of stock A x weight of stock A + Beta of stock B x weight of stock B

1 = 0 x 1 / 3 + 1.09 x 1 / 3 + Beta of stock B x 1 / 3

1 = 0.363333333 + Beta of stock B x 1 / 3

3 x (1 - 0.363333333) = Beta of stock B

Beta of stock B = 1.91

Please note that the beta of risk free asset is zero and the beta of portfolio will be 1 since it is equally as risky as the market.

Feel free to ask in case of any query relating to this question

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