Question

Jeanne Lewis is attempting to evaluate two possible portfolios consisting of the same five assets but held in different proportions. She is particularly interested in using beta to compare the risk of the portfolios and, in this regard, has gathered the following data: a. Calculate the betas for portfolios A and B. b. Compare the risk of each portfolio to the market as well as to each other. Which portfolio is more risky? i Data Table - X (Click on the icon located on the top-right corner of the data table in order to copy its contents into a spreadsheet.) Asset NmL Asset Beta 1.31 0.67 1.26 1.05 0.93 Portfolio Weights Portfolio Portfolio B 10% 28% 29% 13% 6% 17% 5% 23% 50% 19% 100% 100% Total

(Round answer to three decimal places)

Answer 1

a. Calculation of portfolio Betas
Beta Indicates the risk of the Portfolio or Asset
			Portfolio - A			Portfolio - B
Asset	Assets Beta		Weights	Weighted Asset Beta= Asset Beta*Weights		Weights	Weighted Asset Beta= Asset Beta*Weights
1	1.31		10%	0.131		28%	0.3668
2	0.67		29%	0.1943		13%	0.0871
3	1.26		6%	0.0756		17%	0.2142
4	1.05		5%	0.0525		23%	0.2415
5	0.93		50%	0.465		19%	0.1767
		Total	100%	0.9184	Total	100%	1.0863
b. Compare the Risk of each Portfolio to Market and as well as each other
Note: 1. If the entire amount is invested only in one particular asset i.e., to say only Asset- 1 or 2 so on
then the point of comparison will be the Portfolio Beta with that of Particular Asset Beta
2. Negative Value in comparison indicates :More Risky the investment in only Asset" than Compared to investing in Portfolios
Asset	Assets Beta		Portfolio - A (Beta)	Comparison =   Portfolio- A Beta minus Asset Beta			Portfolio - B (Beta)	Comparison =   Portfolio- B Beta minus Asset Beta
1	1.31		0.9184	-0.3916			1.0863	-0.2237
2	0.67		0.9184	0.2484			1.0863	0.4163
3	1.26		0.9184	-0.3416			1.0863	-0.1737
4	1.05		0.9184	-0.1316			1.0863	0.0363
5	0.93		0.9184	-0.0116			1.0863	0.1563
	Particulars		Beta
	Portfolio- A		0.9184
	Portfolio- B		1.0863
The Portfolio - A is Less risky than compared to Portfolio - B based on the above Beta Values