Question

You own a portfolio that has a total value of $125,000 and a beta of 1.27. You have another $46,000 to invest and you would like the beta of your portfolio to decrease to 1.17. What does the beta of the new investment have to be in order to accomplish this?

Multiple Choice

• .786

• .991

• .898

• 1.084

• 1.220

Answer 1

Existing value of Portfolio = 125,000

Existing beta of portfolio = 1.27

You want to Invest another amount in Portfolio = $46,000

Current Value of portfolio = $125,000 +$46,000

= $171,000

New/current beta of portfolio = 1.17

Calculating the beta of $46,000 investment:-

1.17 = ($125,000/$171,000)*(1.27) + ($46,000/$171,000)*(Beta)

1.17 = 0.9284 + 0.2690Beta

Beta = 0.898

So, Beta of the new Investments is 0.898

Hence, option C

If you need any clarification, you can ask in comments.     

If you like my answer, then please up-vote as it will be motivating