18,968 views
41 votes
41 votes
You own a portfolio equally invested in a risk-free asset and two stocks (If one of the stocks has a beta of 1 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio

User Kevinbrink
by
2.6k points

1 Answer

12 votes
12 votes

Answer:

2

Step-by-step explanation:

Beta measures systemic risk

The higher beta is, the higher the systemic risk and the higher the compensation demanded for by investors

The market has a beta of one. If a portfolio has the same level of systematic risk that is the same as that of the market, its beta would be equal to 1.

If the portfolio is less risky than the market, its beta would be less than one

If the portfolio is more risky than the market, its beta would be greater than one

The beta of a risk free asset is zero

The portfolio's beta can be determined by adding together the weighted beta of each stock in the portfolio

1 = (1/3 x 1) + (1/3 x 0) + (1/3 x s)

1 = 1/3 + (1/3 x s)

1 - 1/3 = 1/3s

2/3 = 1/3s

s = 2/3 x 3 = 2

User Jason Allen
by
2.9k points