Question

An investor wishes to invest equal amounts in three stocks and to achieve a portfolio beta of 1.2. If stock A has a beta of 0.9 and stock B has has a beta of 1.1. What must be the beta of stock C? a. 1.8 b. 1.2 c. 0.7 d. 1.6

Answer 1

Answer:

Beta of Stock C is 1.6

correct option is d. 1.6

Explanation:

given data

portfolio beta = 1.2

stock A beta = 0.9

stock B beta = 1.1

to find out

beta of stock C

solution

we will apply here Portfolio Beta equation that is express as

Portfolio Beta = ( Weight of Stock A × Beta of Stock A ) + ( Weight of Stock B   × Beta of Stock B ) +  ( Weight of Stock C × Beta of Stock C )    ......................1

here weight for each stock = $\frac{1}{3}$

put here value we will get

1.2 =  ( $\frac{1}{3}$ × 0.9 ) + ( $\frac{1}{3}$ × 1.1 ) +  ( $\frac{1}{3}$ × Beta of Stock C )

solve it we will get

Beta of Stock C = 1.599

so Beta of Stock C is 1.6

and correct option is d. 1.6