What is the weighted average beta of the following portfolio? -Stock L has a beta of 1.45 and...

Question:

What is the weighted average beta of the following portfolio?

-Stock L has a beta of 1.45 and constitutes 10% of the portfolio

-Stock M has a value of $125,000 with a beta of 0.93

-While Stock N makes up 40% of the portfolio with a beta of 0.65 and

- Stock O, with a 2.2 beta has a dollar value of $175,000

a.) 1.24

b.) 1.31

c.) 1.54

d.) 1.76

Answer and Explanation:

The beta of portfolio is 1.24 (Option A)

Form the given data:

Stock L and N together constitutes 50% of the portfolio

So, Stock M and Stock O should constitute remaining 50%

And total investment in stock M and Stock O = $125,000 + $175,000 = $300,000

So, 50% of the portfolio = $300,000

Therefore, total amount invested in portfolio = $600,000

  • weight of Stock M = $125,000 / $600,000 = 0.2083
  • weight of stock O = $175,000 / $600,000 = 0.2917

Beta of Stock L = 1.45

Beta of Stock M = 0.93

Beta of Stock N = 0.65

Beta of Stock O = 2.20

{eq}Portfolio\ \beta = 0.1 * 1.45 + 0.2083 * 0.93 + 0.40 * 0.65 + 0.2917 * 2.20 = 1.24 {/eq}


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