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?

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

jeff jeffy answered 7 months ago

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