Question

Abrams builds a portfolio by investing in two stocks only: Google (GOOG) and Nokia (NOK). According to the CAPM, the expected risk premium (i.e., the expected return minus the risk-free rate) of GOOG is 8.1% and the expected risk premium of NOK is 5.36%. The beta of GOOG is equal to 1.29. If Abrams puts 71% of his money in GOOG stock and 29% in NOK stock, what is the approximate beta of his portfolio?

Answer 1

The approximate beta of portfolio is computed as shown below:

= Beta of GOOG x weight of GOOG + Beta of NOK x weight of NOK

Market risk premium is computed as follows:

= Expected risk premium of GOOG / Beta of GOOG

= 8.1% / 1.29

= 0.062790698

Beta of NOK is computed as follows:

= Expected risk premium of NOK / Market risk premium

= 5.36% / 0.062790698

= 0.853629625

So, the beta will be as follows:

= 1.29 x 0.71 + 0.853629625 x 0.29

= 1.16 Approximately

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