Question

In: Finance

You own a portfolio equally invested in a risk-free asset and two stocks (If one of...

You own a portfolio equally invested in a risk-free asset and two stocks (If one of the stocks has a beta of 1.54 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio? (Hint: Remember that the market has a Beta=1; also remember that equally invested means that each asset has the same weight- since there are 3 assets, each asset's weight is 1/3 or 0.3333). Enter the answer with 4 decimals (e.g. 1.1234)

Solutions

Expert Solution

Portfolio beta=Respective beta*Respective weight

1=(1.54*1/3)+(Beta of other stock*1/3)+(0*1/3)[NOTE:Beta of market=1;Beta of risk-free assets=0]

1=0.5133+(1/3*Beta of other stock)

Beta of other stock =(1-0.5133)*3

=1.46


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