SOLUTION: You hold a diversified portfolio consisting of a $10,000 investment in each of 15 different common stocks (i.e., your total investment is $150,000). The portfolio beta is equal to

Question 1071540: You hold a diversified portfolio consisting of a $10,000 investment in each of 15 different common stocks (i.e., your total investment is $150,000). The portfolio beta is equal to 1.1 . You have decided to sell one of your stocks which has a beta equal to 2.2 for $10,000. You plan to use the proceeds to purchase another stock which has a beta equal to 1.8 . What will be the beta of the new portfolio? Show your answer to 2 decimal places
Answer by Theo(13342) (Show Source): You can put this solution on YOUR website!
you have a 10,000 investment in each of 15 different common stocks.
your total investment is 15 * 10,000 = 150,000.
the portfolio beta is equal to 1.1.

you sell one of yuor stocks for $10,000.
this stock has a beta of 2.2.

you plan to use the proceeds to buy another stock for $10,000 which has a beta of 1.8.

what is the new beta of your portfolio?

the original portfolio had an average beta of 1.1.

multiply that by 15 and the total beta of the portfolio is equal to 16.5

take away a beta of 2.2 and the total portfolio beta becomes 14.3.

add a beta of 1.8 and the total portfolio beta becomes 16.1.

the average beta of the portfolio now becomes 16.1 / 15 = 1.0733333.

this is rounded to 1.07.

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