Question

An investor is forming a portfolio by investing $50,000 in stock A that has a beta of 0.5, and $25,000 in stock B that has a beta of 0.90. What is the beta of the combined portfolio?

Answer 1

To answer this question we should have some understanding about the beta of a stock and what it tells:

Beta : It is a measure used in fundamental analysis where we use beta to determine the volatiliy of a stock with regard to the overall market.

A market has always a beta of 1.0, and we use it to compare the stocks movement.

To calculate the beta of the portfolio we first need to calculate the weight of the stocks in the portfolio, then we will multiply the respective weigths with their betas.

Now, from the above question we have following information.

Stock "A" beta = 0.5

amount invested in stock "A" = $50,000

Stock "B" beta = 0.90

amount invested in stock "B" = $25,000

Total amount invested (Sum of "A" & "B") = $50,000 + $25,000 = $75,000

Weigth of the stock "A" in the portfolio = $50,000 / $75,000 = 0.67

Weight of stock "B" in the portfolio = $25,000 / $75,000 = 0.33

Now to calculate Beta of the portfolio we have following formula:

Portfolio beta = Weight of stock "A" * Beta of stock " A " + Weight of stock "B" * Beta of stock "B"

therefore, portfolio beta = 0.67 * 0.5 + 0.33 * 0.90 = 0.632

Hence, beta of the portfolio will be 0.632.