Question

If your $500,000 portfolio has a beta of 1.8, should you add $50,000 of a stock with a beta of 1.1 and an expected return of 12%?

A. Yes

B. No

C. Not enough information to answer

Please show your work, thanks!

Answer 1

The correct answer is C. Not enough information to answer.

Although the beta of the portfolio and the new stock is available to compare, the expected return of the portfolio is missing. The new stock is less risky than the portfolio as it has a lesser beta(1.1 as compared to 1.8). If the expected return of the portfolio is not very high or similar to or lesser than the expected return of the new stock, this new stock might be added to the portfolio. It can finally be decided after the availability of the expected rate of return of the portfolio.