Question
In: Finance
Suppose you held a diversified portfolio consisting of a $7,500 investment in each of 20 different...
Suppose you held a diversified portfolio consisting of a $7,500 investment in each of 20 different common stocks. The portfolio's beta is 1.31. Now suppose you decided to sell one of the stocks in your portfolio with a beta of 1.0 for $7,500 and use the proceeds to buy another stock with a beta of 1.35. What would your portfolio's new beta be? Do not round intermediate calculations. Round your answer to two decimal places.
Solutions
Expert Solution
| Total Portfolio value = Value of 19 stocks + Value of Stock sold |
| =142500+7500 |
| =150000 |
| Weight of 19 stocks = Value of 19 stocks/Total Portfolio Value |
| = 142500/150000 |
| =0.95 |
| Weight of Stock sold = Value of Stock sold/Total Portfolio Value |
| = 7500/150000 |
| =0.05 |
| Beta of Portfolio = Weight of 19 stocks*Beta of 19 stocks+Weight of Stock sold*Beta of Stock sold |
| 1.31 = Beta of 19 stocks*0.95+1*0.05 |
| Beta of 19 stocks = 1.3263 |
| Total Portfolio value = Value of 19 stocks + Value of Stock bought |
| =142500+7500 |
| =150000 |
| Weight of 19 stocks = Value of 19 stocks/Total Portfolio Value |
| = 142500/150000 |
| =0.95 |
| Weight of Stock bought = Value of Stock bought/Total Portfolio Value |
| = 7500/150000 |
| =0.05 |
| Beta of Portfolio = Weight of 19 stocks*Beta of 19 stocks+Weight of Stock bought*Beta of Stock bought |
| Beta of Portfolio = 1.3263*0.95+1.35*0.05 |
| Beta of Portfolio = 1.33 |
jeff jeffy answered 1 year agoRelated Solutions
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