your portfolio has a beta of 1.24. The portfolio consists of 17 percent U.S. Treasury bills,...
your portfolio has a beta of 1.24. The portfolio consists of 17 percent U.S. Treasury bills, 29 percent in stock A, and 54 percent in stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of stock B?
Homework Answers
| Given that - | ||||||||||
| Portfolio beta | 1.24 | |||||||||
| U.S. Treasury bills beta | 0 | |||||||||
| Stock A beta | 1 | |||||||||
| Note : US treasury bill (risk free asset) will have zero beta. Stock A replicate market. Hence, stock A will have Beta = 1 | ||||||||||
| Weight | ||||||||||
| U.S. Treasury bills | 17% | |||||||||
| Stock A | 29% | |||||||||
| Stock B | 54% | |||||||||
| Total | 100% | |||||||||
| Beta of poftfolio = Treasury bill beta*Treasury bill weight + Stock A beta * Stock A weight + Stock B beta * Stock B weight | ||||||||||
| 1.24= | =17%*0+1*29%+Stock B beta * 54% | |||||||||
| Stock B beta * 54% = | =1.24-(17%*0+1*29%) | |||||||||
| Stock B beta *54% | 0.95 | |||||||||
| Stock B beta | 1.76 | |||||||||
| Answer = 1.76 | ||||||||||
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