You currently own a portfolio valued at $16,000 that has a beta of 1.2. You have another $8,000...

Question:

You currently own a portfolio valued at $16,000 that has a beta of 1.2. You have another $8,000 to invest and would like to invest it in a manner such that the risk of your portfolio matches that of the overall market. What does the beta of the new security have to be?

a. 0.5

b. 0.9

c. 0.8

d. 0.3

e. 0.6

Beta:

This problem relates to the concept of beta. In the finance realm, beta refers to a coefficient which measures the volatility, or systematic risk, of an individual stock in comparison to the unsystematic risk of the entire stock market. In a statistical sense, beta represents the slope of the line through a regression of data points, which charts an individual stock's returns against those of the broader market.

Answer and Explanation:

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The beta of the new security must be 0.6060.

While this problem contains a reference to beta, it does not entail any complex financial computations. ...

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Using the Systematic Risk Principle & Portfolio Beta

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Chapter 12 / Lesson 3
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In this lesson, we'll discuss how investors must understand the systematic risk principle in their portfolio. We'll also explain how investors can measure and define the risk of their portfolios using betas.


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