In: Finance
An individual has $10,000 invested in a stock with a beta of 0.4 and another $55,000 invested in a stock with a beta of 2.5. If these are the only two investments in her portfolio, what is her portfolio's beta? Round your answer to two decimal places.
Notes: We calculate portfolio beta by calculating weight of each investment in the portfolio and then beta is multiplied with beta of each investment to get portfolio beta. |
Solution: | ||
Portfolio's beta 2.18 | ||
Working Notes: | ||
Beta of a Portfolio = Weighted average risk of individual assets. | ||
B1 = 0.40 | ||
W1 = investment 1 / total investment | ||
= 10,000/(10,000 + 55,000) = 10,000/65,000 | ||
= (10/65) | ||
B2 = 2.50 | ||
W2 = investment 2/ total investment | ||
= 55,000/(10,000 + 55,000) = 55,000/65,000 | ||
= (55/65) | ||
Beta of a Portfolio = Weighted average risk of individual assets. | ||
= B1 x W1 + B2 x W2 | ||
= 0.40 x (10/65) + 2.5 x (55/65) | ||
= 2.176923077 | ||
=2.18 | ||
Please feel free to ask if anything about above solution in comment section of the question. |