Question

Suppose Stan holds a portfolio consisting of a $10,000 investment in each of 8 different common stocks. The portfolio's beta is 1.25. Now suppose Stan decided to sell one of his stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.35. What would the portfolio's new beta be

Answer 1

Answer:

1.29

Explanation:

From the question above Stan holds a portfolio consisting of $10,000 investment in each 8 different common stocks

The portfolio's beta is 1.25

Suppose Stan decides to sell one of his stocks that has a beta of 1.00

He then used the money gotten from it to buy a replacement stock with beta of 1.35

The first step is to calculate the amount and weight in each stock

Amount in each stock = 10,000/8

= $1,250

Weight in each stock= 1250/10,000

= 0.125

The next step is to calculate the change in portfolio's beta

= weight × change in security beta

= 0.125×(1.35-1)

= 0.125× 0.35

= 0.04375

Therefore, the new porfolio's beta can be calculated as follows

= 1.25+0.04375

= 1.29

Hence the new portfolio's beta would be 1.29