Question

Paul McLaren holds the following portfolio: Stock Investment Beta A $150,000 1.40 B 50,000 0.80 C 100,000 1.00 D 75,000 1.20 Total $375,000 Paul plans to sell Stock A and replace it with Stock E, which has a beta of 0.75. By how much will the portfolio beta change? a. −0.190 b. −0.211 c. −0.234 d. −0.286

Answer 1

Answer:

- 0.260

Explanation:

The computation of portfolio beta is shown below:-

Stocks     Value          Weight (a)         Beta (b)     Portfolio Beta (a × b)

Stock A    $150,000   0.4000               1.4              0.560

Stock B    $50,000     0.1333                0.8             0.107

Stock C    $100,000    0.2667              1                  0.267

Stock D     $75,000     0.2000            1.2               0.240

Total         $375,000                                                    1.173

Now the revise of beta with stock E is

Stocks     Value          Weight (a)         Beta (b)     Portfolio Beta (a × b)

Stock E    $150,000   0.4000               0.75             0.300

Stock B    $50,000     0.1333                0.8               0.107

Stock C    $100,000    0.2667              1                    0.267

Stock D     $75,000     0.2000            1.2                 0.240

Total         $375,000                                                 0.913

Now

Net Change in Beta of Portfolio is

= Beta of portfolio with Stock E - Beta of Portfolio with Stock A

= 0.913 - 1.173

= - 0.260

This is the answer but the same is not provided in the given options