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SHOW WORK PLEASE Complete problem: Portfolio Beta You have a $4 million portfolio consisting of a...

SHOW WORK PLEASE

Complete problem: Portfolio Beta You have a $4 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta of 1.1. You are considering selling $100,000 worth of one stock with a beta of 0.9 and using the proceeds to purchase another stock with a beta of 1.4. What will the portfolio’s new beta be after these transactions? Show your work.

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Answer #1

Solution :-

There is a little mistake in Question as It is $2 millions in place of $4 millions Because $100,000 investment in each of 20 different stock

Stocks in portfolio = 20

Worth of each stock in the portfolio = 100,000 dollars.

Portfolio has a beta = 1.1

This is the average of the beta of all the stocks in your portfolio.

Sell one stock that has a beta of .9 and using the proceeds to purchase another stock with a beta of 1.4.

the impact on your portfolios beta =

the $100,000 stock is worth 100,000 / 2,000,000 = .05 of your portfolio

your portfolio's beta is 1.1

you subtract .05 * .9 from it and you add .05 * 1.4 to it.

the resulting impact on the portfolio beta should be:

=  1.1 - .05*.9 + .05*1.4 =  1.125

your portfolios beta after the transaction is equal to 1.125

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