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We were not given an answer to this question for practice. Could someone please help and...

We were not given an answer to this question for practice. Could someone please help and show your work? Taking business finance.

  1. You are constructing a portfolio of two assets with a desired portfolio Beta of 1.25. If the two assets are equally weighted and the Beta of one asset is 0.9, what is the Beta of the other?
    1. 1.5
    2. 1.75
    3. 1.1
    4. 2.0
    5. 1.6

                          

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Answer #1

Beta of a portfolio is weighted average of the betas of assets in the portfolio

So, Beta of a portfolio = W1*Beta1 + W2*Beta2

Since both the assets have equal weight, so, W1 = W2 = 0.5

So, 1.25 = 0.9*0.5 + Beta*0.5

=> Beta = 1.6

So Beta of other stock is 1.6. option e is correct.

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