Question

Suppose Stan holds a portfolio consisting of a $10,000 investment in each of 8 different common stocks. The portfolio's beta is 1.25. Now suppose Stan decided to sell one of his stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 0.94. What would the portfolio's new beta be?

Select the correct answer.

a. 1.14

b. 1.19

c. 1.24

d. 1.34

e. 1.29

Answer 1

Portfolio's new beta = 1.25-(1-0.94)*1/8 =	1.24
Answer: [c] 1.24
Explanation:
Portfolio's beta is the weighted average of the
betas of the component securities. The weights
of the individual securities is the proportion in
which their values are in the total value of the
portfolio.
In the said portfolio, each security has a weight
of 1/8.
So, when one security with beta of 1 is replaced
with another security having beta of 0.94, the
weights of the deleted and added security being
the same, the portfolio will change by the
increase or decrease in beta*1/8.