Question

Tom Noel holds the following portfolio: Stock Investment Beta $150,000 1.40 $50,000 0.80 $100,000 1.00 $75,000 1.20 Total $375,000 Tom plans to sell Stock A and replace it with Stock E, which has a beta of 0.83. By how much will the portfolio beta change? Do not round your intermediate calculations.

Answer 1

Answer-

Working note 1

Calculation of portfolio beta before replace of Stock A

Stock	Investment (a)	Weight (b= a / $375000)	Beta (c)	Portfolio Beta (d=b*c)
A	$150,000	0.40	1.40	0.56
B	$50,000	0.133	0.80	0.1064
C	$100,000	0.267	1.00	0.267
D	$75,000	0.20	1.20	0.24
TOTAL	$375,000	1.00		1.1734

Working note 2

Calculation of portfolio beta before replace of Stock A with stock E

Stock	Investment (a)	Weight (b= a / $375000)	Beta (c)	Portfolio Beta (d=b*c)
E	$150,000	0.40	0.83	0.332
B	$50,000	0.133	0.80	0.1064
C	$100,000	0.267	1.00	0.267
D	$75,000	0.20	1.20	0.24
TOTAL	$375,000	1.00		0.9454

Portfolio beta changes after replace of Stock A With stock E = 1.1734 - 0.9454

= 0.228

Note- It is assumed that amount invested in stock E is $150,000