Question

An individual has $30,000 invested in a stock with a beta of 0.4 and another $50,000 invested in a stock with a beta of 2.2. If these are the only two investments in her portfolio, what is her portfolio's beta? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Given about an individual's investment,

Investment in stock A = $30000

Beta of stock A = 0.4

Investment in stock B = $50000

Beta of stock B = 2.2

So, total investment = Investment in stock A + investment in stock B = 30000 + 50000 = $80000

So, weight in stock A = Investment in stock A/Total investment = 30000/80000 = 0.375 or 37.50%

similarly, weight in stock B = Investment in stock B/Total investment = 50000/80000 = 0.625 or 62.50%

Beta of a portfolio is weighted average return on its assets

=> Beta of this portfolio = Wa*Ba + Wb*Bb = 0.375*0.4 + 0.625*2.2 = 1.53