You invested $4000 in stock A that has a required return of 9%, the risk-free rate...

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You invested $4000 in stock A that has a required return of 9%, the risk-free rate...

You invested $4000 in stock A that has a required return of 9%, the risk-free rate is 4.5% and the market risk premium is 3%. C. Now supposed you add another stock to your portfolio by investing $6,000 in stock B that has a beta equal to 1.5. What is your portfolio’s beta after adding stock B?

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Answer 1

Answer #1

The portfolio’s beta after adding stock B is computed as shown below:

Beta of stock A is computed as shown below:

Required return = Risk free rate + Beta x Market risk premium

0.09 = 0.045 + Beta x 0.03

Beta = 1.5

So the portfolio beta will be:

= Beta of A x Investment in A / (Investment in A + Investment in B ) + Beta of B x Investment in B / (Investment in A + Investment in B )

= 1.5 x $ 4,000 / ( $ 4,000 + $ 6,000 ) + 1.5 x $ 6,000 / ( $ 4,000 + $ 6,000 )

= 1.5

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Answer 2

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