Question

Jill Angel holds a $200,000 portfolio consisting of the following stocks. The portfolio's beta is 0.88.

Stock		Investment		Beta
A		$50,000		0.50
B		$50,000		0.80
C		$50,000		1.00
D		$50,000		1.20
Total		$200,000

  
If Jill replaces Stock A with another stock, E, which has a beta of 1.45, what will the portfolio's new beta be? Do not round your intermediate calculations. Please no excel answers

	a.	1.11
	b.	1.39
	c.	0.83
	d.	1.22
	e.	1.28

Answer 1

a. 1.11

Portfolio beta is the average beta of portfolio.
Step-1:Calculation of weight of each investment
	Weight of:
	Stock E	$       50,000	/	$       2,00,000	=	0.25
	Stock B	$       50,000	/	$       2,00,000	=	0.25
	Stock C	$       50,000	/	$       2,00,000	=	0.25
	Stock D	$       50,000	/	$       2,00,000	=	0.25
Step-2:Calculation of portfolio new beta
			Weight	Beta
			a	b	c=a*b
	Stock E		0.25	1.45	0.36
	Stock B		0.25	0.80	0.20
	Stock C		0.25	1.00	0.25
	Stock D		0.25	1.20	0.30
	Total				1.11
Thus, portfolio's new beta is 1.11