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24 November, 10:35

Suppose you held a diversified portfolio consisting of a $7,500 investment in each of 20 different common stocks. The portfolio's beta is 0.65. Now suppose you decided to sell one of the stocks in your portfolio with a beta of 1.0 for $7,500 and use the proceeds to buy another stock with a beta of 1.50. What would your portfolio's new beta be

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  1. 24 November, 13:49
    0
    0.68

    Explanation:

    A portfolio consists of an investment of $7,500

    The amount of common stock is 20

    The portfolio beta is 0.65

    Suppose one of the stock in the portfolio is sold with a beta of 1.0 for $7,500

    The proceeds realized is then used to purchase another stock with a beta of 1.50

    The first step is the to calculate the change in beta

    Change in beta = 1.50-1

    = 0.5

    The next step is to divide the change in beta by the number of common stock

    = 0.5/20

    = 0.025

    Therefore, the new beta can be calculated as follows

    = 0.65+0.025

    = 0.68

    Hence the new portfolio's beta is 0.68
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