Question

Question 12

Looking at a list of beta coefficients you spot a number of stocks as possible buys for your new stock portfolio. You have $125,000 to invest. You have decided to have just three stocks in your portfolio (this will make it easier to follow than a portfolio of more stocks). You have selected two already: The Gap with a beta of .4 and Disney with a beta of .95. You have invested $15,000 in each. For the final selection you are looking at Ford with a beta of 1.56, ebay with a beta of .88, IBM with a beta of 0.99 and the parent of Anheuser-Busch with a beta of 1.2. You would like the overall beta of your portfolio to be as close to "the market" or "average stock" as possible.

Answer 1

Beta of the market is 1. Here we are looking to invest in the third stock which will bring overall Beta close to the market i.e. 1

Remaining amount available for investment in third stock

If the investment is made in Ford then B of the portfolio becomes = 1.35

Stock	Investement	Weight	Beta	Weighted Beta
GAP	15000	0.12	0.4	0.05
Disney	15000	0.12	0.95	0.11
Ford	95000	0.76	1.56	1.19
	125000			1.35

In the investment is made in E bay then Beta of the portfolio is 0.83

Stock	Investement	Weight	Beta	Weighted Beta
GAP	15000	0.12	0.4	0.05
Disney	15000	0.12	0.95	0.11
Ebay	95000	0.76	0.88	0.67
	125000			0.83

If the investment is made in IBM portfolio Beta becomes 0.91

Stock	Investement	Weight	Beta	Weighted Beta
GAP	15000	0.12	0.4	0.05
Disney	15000	0.12	0.95	0.11
IBM	95000	0.76	0.99	0.75
	125000			0.91

If the investment is made in Anheuser-Busch portfolio Beta becomes 1.07

Stock	Investement	Weight	Beta	Weighted Beta
GAP	15000	0.12	0.4	0.05
Disney	15000	0.12	0.95	0.11
Anheuser-Busch	95000	0.76	1.2	0.91
	125000			1.07

Here the closest to Market Beta is when invested in Anheuser -Bushch so invest in the same