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You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks...

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You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 2.05, and the total portfolio is exactly as risky as the market, what must the beta be for the other stock in your portfolio?

Portfolio Beta

Portfolio beta refers to the weighted average beta of the individual investment in a portfolio. It is computed as the sum of the products of weights of individual investment and beta of the respective investments. It is a measure of the systematic risk of the portfolio.

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Let the beta of the other stock be {eq}\beta_{3} {/eq}

Since the total portfolio is exactly as risky as the market, therefore the beta of the...

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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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