Question

In: Finance

Jones Smith holds the following portfolio: Stock Investment Beta A $350,000 1.50 B    550,000 0.80 C...

Jones Smith holds the following portfolio:

Stock

Investment

Beta

A

$350,000

1.50

B

   550,000

0.80

C

  600,000

1.80

D

875,000

1.40

Jones plans to sell Stock A and replace it with Stock E, which has a beta of 0.75. By how much will the portfolio beta change?

Solutions

Expert Solution

Ans 0.1105

WITH STOCK A
Stock INVESTMENT (i) Beta (ii) Investment* Beta (i)* (ii)
A                                3,50,000                    1.50                         5,25,000.00
B                                5,50,000                    0.80                         4,40,000.00
C                                6,00,000                    1.80                      10,80,000.00
D                                8,75,000                    1.40                      12,25,000.00
Total                             23,75,000                      32,70,000.00
AVERAGE BETA = (INVESTMENT * BETA) / TOTAL INVESMENT
3270000 / 2375000
1.376842105
WITH STOCK E
Stock INVESTMENT (i) Beta (ii) Investment* Beta (i)* (ii)
E                                3,50,000                    0.75                         2,62,500.00
B                                5,50,000                    0.80                         4,40,000.00
C                                6,00,000                    1.80                      10,80,000.00
D                                8,75,000                    1.40                      12,25,000.00
Total                             23,75,000                      30,07,500.00
AVERAGE BETA = (INVESTMENT * BETA) / TOTAL INVESMENT
3007500 / 2375000
1.266315789
CHANGE IN STOCK = 1.3768 - 1.2663
0.1105

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