In: Finance
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?
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 | |||