Final answer:
The beta of an equally weighted portfolio of Ford and Safeway is calculated by taking the weighted average of their individual betas. Since both stocks are equally weighted at 50%, their betas are averaged to find the portfolio beta, which is 1.695.
Step-by-step explanation:
The beta of a portfolio is the weighted average of the betas of the individual assets in that portfolio. When combining two assets in an equally weighted portfolio, each asset represents 50% of the portfolio. Therefore, to find the beta of an equally weighted portfolio of Ford (F) with a beta of 2.67 and Safeway (SWY) with a beta of 0.72, we use the following formula:
Beta(Portfolio) = (Weight of Ford × Beta of Ford) + (Weight of Safeway × Beta of Safeway)
Given that the weights are equal, both weights are 0.5:
Beta(Portfolio) = (0.5 × 2.67) + (0.5 × 0.72) = 1.335 + 0.36 = 1.695
Thus, the correct answer is c. 1.695.
Portfolio Beta is a measure that assesses the systematic risk or volatility of a portfolio in relation to the overall market. It quantifies the portfolio's sensitivity to market movements. Calculated by taking the weighted sum of individual asset betas, each multiplied by its portfolio weight, the formula reflects how the portfolio is likely to perform concerning market fluctuations. A Beta greater than 1 implies higher volatility than the market, while less than 1 indicates lower volatility. Understanding Portfolio Beta aids investors in managing risk, diversifying portfolios, and making strategic investment decisions aligned with their risk tolerance and market expectations.