Question

One portfolio has three securities. Stock A accounts for 50% with beta =1, stock B accounts for

10% with beta 50% lower than market beta and stock C accounts for the rest with beta 20%

higher than the market average. What is the systematic risk of such a portfolio?

Answer 1

Market Average Beta = 1, Stock B = 50% lower than Market Average Beta = 1 x 0.5 = 0.5 and Stock C = 20 % higher than Market Average Beta = 1.2 x 1 = 1.2

Stock A Weight = 50%, Beta = 1, Stock B Weight = 10% , Beta = 0.5 and Stock C = 40% and Beta = 1.2

Weighted Average Beta of the Portfolio = Systematic Risk of the Portfolio = 0.5 x 1 + 0.1 x 0.5 + 0.4 x 1.2 = 1.03