Question

An individual has $10,000 invested in a stock with a beta of 0.7 and another $40,000 invested in a stock with a beta of 1.5 . If these are the only two investrnents in her portfolio, what is her portfolio's beta? Do not round intermediate cakulations. Round your answer to fwo decimal places

Answer 1

The portfolio's beta, which measures its volatility relative to the market, is calculated as the weighted average of the individual stock betas. The final beta of the portfolio is 1.34 after rounding to two decimal places.

Step-by-step explanation:

To determine the portfolio's beta, we need to calculate the weighted average of the individual stock betas based on their proportion in the total investment. The calculation is as follows:

• Investment in stock 1: $10,000 with a beta of 0.7
• Investment in stock 2: $40,000 with a beta of 1.5

The total investment is $10,000 + $40,000 = $50,000. Now, we calculate the weighted betas:

• Weighted beta for stock 1: (0.7 * $10,000) / $50,000 = 0.14
• Weighted beta for stock 2: (1.5 * $40,000) / $50,000 = 1.2

The portfolio's beta is the sum of these weighted betas: 0.14 + 1.2 = 1.34.

Therefore, the beta of the portfolio is 1.34, rounded to two decimal places.