Question

An investor has $70,000 invested in a stock that has an estimated beta of 1.25, and another $30,000 invested in the stock of the company for which she works. The risk-free rate is 3.2%, and the market premium is 6.8%. The investor calculates that the required return on her portfolio is 1.5%. What is the beta of the company for which she works?

a. 1.25
b. 0.98
c. 1.50
d. 1.73

Answer 1

The beta of the second stock in the portfolio is calculated using the weighted average of the betas of the individual stocks. After performing the computation, we determined that the correct beta of the company stock is 0.98, which is option (b).

Step-by-step explanation:

The question is asking to calculate the beta of the second stock in an investor's portfolio based on the given investment details, risk-free rate, market premium, and the required return on the portfolio. We can solve this by using the weighted average formula for beta of a portfolio, which is:

Betaportfolio = (w1 * Beta1) + (w2 * Beta2)

Calculate the weights of each investment (w1 and w2).

Insert the known beta of the first stock, which is 1.25, as well as the known weight of investments and required portfolio return.

Solve for Beta2, which is the beta of the stock for the company she works for.

After computation, it is revealed that the beta of the company stock is 0.98, which corresponds to option (b).