Question

An individual has $50,000 invested in a stock with a beta of 0.5 and another $30,000 invested in a stock with a beta of 2.4. 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

Portfolio beta is the weighted average beta of the portfolio. First we will calculate the weights of the two stocks given as per below:

We will calculate the weight of each stock by dividing the amount invested in each stock by the total amount the amount of $80000 invested in the stock i.e. $50000 + $30000.:

Stock A: $50000 / $80000 = 0.625

Stock B: $30000 / $80000 = 0.375

In the next step we will multiply the weights calculated above with the betas of the stocks to find the weighted betas of the stocks:

Stock A: 0.625 * 0.5 = 0.3125

Stock B: 0.375 * 2.4 = 0.9

Now, we will calculate the weighted average beta / Portfolio beta by adding the weighted betas of the stocks calculated above:

Weighted average beta or Portfolio beta = 0.3125 + 0.9 = 1.21