You would like to combine a highly risky stock with a beta of 2.6 with U.S. Treasury bills in...

Question:

You would like to combine a highly risky stock with a beta of 2.6 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury bills?

Portfolio Beta:

The beta of a portfolio measures the overall market risk of the portfolio. The beta of a portfolio is calculated as the average of the betas of assets in the portfolio, weighted by the market value of each asset.

Answer and Explanation:

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For the portfolio to be as risky as the overall market, it must have a beta of 1. The portfolio's beta is the weighted average of 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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