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You own $25,080 of Human Genome stock that has a beta of 3.72. You also own $13,376 of Frozen...

Question:

You own $25,080 of Human Genome stock that has a beta of 3.72. You also own $13,376 of Frozen Food Express (beta=1.87) and $3,344 of Molecular Devices (beta=0.46). What is the beta of your portfolio? (Round your answer to 2 decimal places.)

Beta:

Beta refers to the systematic risk of the stocks relative to the market risk. A beta of more than 1.0, indicates that the stock is riskier than the benchmark market and vice versa.

Answer and Explanation:

Formula on calculating the portfolio beta:

{eq}P_{\beta}=\sum \beta W_{n}\\ where:\\ \beta=stock~beta\\ W_{n}=portfolio~weight\\ {/eq}


In this case, the total value of the portfolio is the summation of the value of the stocks which is $41,800

{eq}\begin{align*} P_{beta}&=\bigg(3.72*\frac{25,080}{41,800}\bigg)+\bigg(1.87*\frac{13,376}{41,800}\bigg)+\bigg(0.46*\frac{3,344}{41,800}\bigg)\\ &=2.2320+0.5984+0.0368\\ &=2.8672 \end{align*} {/eq}

The beta of the portfolio is 2.8672


Learn more about this topic:

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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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