SOLUTION: Suppose you hold a diversified portfolio consisting of $10,000 invested equally in each of 10 different common stocks. The portfolio's beta is 1.120. Now suppose you decided to sel

Question 270617: Suppose you hold a diversified portfolio consisting of $10,000 invested equally in each of 10 different common stocks. The portfolio's beta is 1.120. Now suppose you decided to sell one of your stocks that has a beta of 1.000 and to use the proceeds to buy a replacement stock with a beta of 1.750. What would the portfolio's new beta be?
Answer by Theo(13342) (Show Source): You can put this solution on YOUR website!
If you are talking about the average beta of the stock portfolio, then the answer would be as follows:

Average beta of the portfolio is 1.120.

Since there are 10 stocks, then the total beta of the portfolio is 10*1.120 = 11.20.

Take away one of the stocks with a beta of 1.0 and your total beta of the portfolio becomes 10.20.

Add a stock with a beta of 1.750 and your total beta of the portfolio becomes 11.95.

Divide that total by 10 and your average beta for the portfolio = 1.195.
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