An individual has $10,000 invested in a stock with a beta of 0.4 and another $55,000...

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.

Expert Solution

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.

jeff jeffy answered 1 year ago

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