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PORTFOLIO BETA Suppose you held a diversified portfolio consisting of a $7,500 investment in each of...

PORTFOLIO BETA

Suppose you held a diversified portfolio consisting of a $7,500 investment in each of 20 different common stocks. The portfolio's beta is 1.25. Now suppose you decided to sell one of the stocks in your portfolio with a beta of 1.0 for $7,500 and use the proceeds to buy another stock with a beta of 1.19. What would your portfolio's new beta be? Do not round intermediate calculations. Round your answer to two decimal places.

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Answer #1

Total portfolio value of the remaining 19 stocks = 7500*19=142500

Weight of Remaining 19 stocks = Value of Remaining 19 stocks/Total Portfolio Value
= 142500/150000
=0.95
Weight of Sold stock = Value of Sold stock/Total Portfolio Value
= 7500/150000
=0.05
Beta of Portfolio = Weight of Remaining 19 stocks*Beta of Remaining 19 stocks+Weight of Sold stock*Beta of Sold stock
1.25 = Beta of Remaining 19 stocks*0.95+1*0.05
Beta of Remaining 19 stocks = 1.2632
Beta of Portfolio = Weight of Remaining 19 stocks*Beta of Remaining 19 stocks+Weight of New stock*Beta of New stock
Beta of Portfolio = 1.2632*0.95+1.19*0.05
Beta of Portfolio = 1.26
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