Question

Tom O'Brien has a 2-stock portfolio with a total value of $100,000. $47,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is his portfolio's beta? Do not round your intermediate calculations. Round your final answer to 2 decimal places.

Answer 1

Answer:

The portfolio beta is 1.10

Explanation:

The portfolio beta is the systematic riskiness of the portfolio. The portfolio beta is the weighted average of the individual stock's betas that comprises the portfolio. For a two stock portfolio, the portfolio beta can be calculated as,

Portfolio beta = wA * βA + wB * βB

Where,

wAand wB represents the prportion of total investments in stocks A & B respectively and βA & βB represents the betas of the stocks.

Portfolio beta = 47500 / 100000 * 0.75  +  52500 / 100000 * 1.42

Portfolio beta = 1.10175 rounded off to 1.10