Question

You hold a diversified portfolio consisting of many different common stocks with a total market value of $100,000. The portfolio beta is equal to 1.15. You have decided to sell one of your stocks, a lead mining stock whose beta is equal to 0.7 , for $10,000 net and to use the proceeds to buy $10,000 of stock in a steel company whose beta is equal to 2.3 . What will be the new beta of the portfolio? (Round to two digit decimal places, e.g., 1.15)

Answer 1

The new beta of the portfolio is 1.31

Step-by-step explanation:

The computation of the new beta portfolio is equal to

= Portfolio beta - (selling Beta × net value ÷ total market value) + (purchase beta × net value ÷ total market value)

= 1.15 - (0.7 × $10,000 ÷ $100,000) + (2.3 × $10,000 ÷ $100,000)

= 1.15 - 0.07 + 0.23

= 1.31

For computing the accurate value we add the purchase beta and deduct the selling beta from the portfolio beta.