Question

Your portfolio is equally invested in 4 assets: Stock W, Stock X, Stock Y, and Treasury Bills. Stock W has a beta of 1.4, and Stock X has a beta of 2. If the total portfolio is as risky as the market, what must be the beta of Stock Y?

Multiple Choice

• 1.67

• 1.40

• 0.60

• 0.85

• 0.15

Answer 1

The beta of Stock Y is computed as shown below:

Portfolio Beta = % of Investment in stock W x Beta of Stock W + % of Investment in stock X x Beta of Stock X +  % of Investment in stock Y x Beta of Stock Y +  % of Investment in Treasury Bills x Beta of Treasury Bills

Portfolio beta will be equal to 1,since the total portfolio is as risky as the market and beta of the market is always 1.

Beta of Treasury stock will be 0, since it is considered to be a risk free asset

1 = 0.25 x 1.4 + 0.25 x 2 + 0.25 x Beta of stock Y + 0.25 x 0

1 = 035 + 0.50 + Beta of Stock Y

Beta of Stock Y = 0.15

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