Question

Jason Jackson is attempting to evaluate two possible portfolios consisting of the same five assets but held in different proportions. He is particularly interested in using beta to compare the risk of the portfolios​ and, in this​ regard, has gathered the following​ data:

                Portfolio Weights  
Asset   Asset Beta    Port- A   Port-B
1              1.32              19%   35%
2              0.74      29%   11%
3             1.29              10%   16%
4             1.06      10%   24%
5             0.92              32%   14%
                      Total   100%   100%

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?

Answer 1

a.

Beta of Portfolio A = 0.19(1.32) + 0.29(0.74) + 0.10(1.29) + 0.10(1.06) + 0.32(0.92)

Beta of Portfolio A = 0.99

Beta of Portfolio B = 0.35(1.32) + 0.11(0.74) + 0.16(1.29) + 0.24(1.06) + 0.14(0.92)

Beta of Portfolio B = 1.13

b.

Portfolio B is more risky as it has more systematic risk as it's beta is higher.