Question

5. Trump invested $60,000 in a 2-stock portfolio. He invested $45,000 in Stock A, and the rest in Stock B. A's beta is 1.60 and B's beta is 0.70. What is the portfolio's beta?

a. 1.167 b. 1.262 c. 1.318 d. 1.327 e. 1.375

Answer 1

Option e is correct

Total Investment = $60,000

Investment in Stock A= $45,000

Investment in Stock B = $60,000 - $45,000 = $15,000

Weight of Stock A = Investment in Stock A / Total Investment = $45,000 / $60,000 = 0.75

Weight of Stock B = Investment in Stock B / Total Investment = $15,000 / $60,000 = 0.25

Stock A beta = 1.60

Stock B beta = 0.70

Portfolio beta = (Weight of Stock A * Stock A beta) + (Weight of Stock B * Stock B beta)

= (0.75 * 1.60) + (0.25 * 0.70)

= 1.2 + 0.175

= 1.375

Portfolio beta is 1.375