Question

You have a portfolio with $5,000 invested in Stock A with a beta of 0.9, $8,000 in Stock B with a beta of 1.8, and $10,000 in Stock C with a beta of 2.0. What is the beta and return of the portfolio? A. beta = 1.78, Return = 9.80% B. beta = 1.69, Return = 12.15% C. beta = 1.57, Return = 9.28% D. beta = 1.78, Return = 14.9%

Answer 1

Information given:

Stock A :

Invested - $5000

beta - 0.9

Weight in portfolio = 5000/5000+8000+10000 = 5000/23000 = 0.217

Stock B:

Invested - $8000

beta - 1.8

Weight in portfolio = 8000/5000+8000+10000 = 8000/23000 = 0.348

Stock C:

Invested - $10,000

beta - 2.0

Weight in portfolio = 10000/5000+8000+10000 = 10000/23000 = 0.435

Thus, the beta of the portfolio is calculated by the follwing formula:

Beta of portfolio = sum of weighted beta of stocks

Beta of portfolio = 0.217*0.9 + 0.348*1.8 + 0.435*2 = 0.1953 + 0.6264 + 0.87

Beta of portfolio = 1.69

Thus, answer is option B. beta = 1.69, Return = 12.15%