Question

SL Energy has $500,000 invested in a 2-stock portfolio. $250,000 is invested in Potts Manufacturing and the remainder is invested in Stohs Corporation. Potts' beta is 2.0 and Stohs' beta is 0.8. What is the portfolio's beta? the portfolio's beta?

Answer 1

The portfolio's beta is 1.4

Step-by-step explanation:

The portfolio beta is the weighted average of the individual betas of the stocks that form up the portfolio. For a two stock portfolio, the formula for portfolio beta can be written as:

Portfolio beta = wA * βa + wB * βb

Where,

• w represents the weightage of investments in stocks
• β represents the betas

Investment in Potts = 250000

Investment in Stohs = 500000 - 250000 = 250000

The portfolio beta = (250000/500000) * 2 + (250000/500000) * 0.8

Portfolio beta = 1.4