Question

Jimmy has equally split his investments between a risk-free asset and two stocks (so Jimmy has 1/3 of his portfolio invested in each asset). One stock, Stock A, has a beta of 1.56 and the portfolio's beta is equal to one. What must the beta be for Stock B, the other stock in Jimmy's portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Stock B's beta is _____.

Answer 1

Given that, Jimmy has 1/3 of his portfolio invested in each asset. So, stock A, stock B and the risk free asset will have weight of 1/3 each.
Beta of the risk free asset=0.
Beta of stock A=1.56
Portfolio beta=1
Weight of stock A*Beta of stock A+Weight of stock B*Beta of stock B+Weight of risk free asset*Beta of risk free asset=Portfolio beta
=>1/3*1.56+1/3*Beta of stock B+1/3*0=1
=>0.52+1/3*Beta of stock B+0=1
=>1/3*Beta of stock B=1-0.52=0.48
=>Beta of stock B=0.48/(1/3)
=>Beta of stock B=1.44