Question

One portfolio has three securities. Stock A accounts for 50% with beta =1, stock B accounts for 10% with beta 50% lower than market beta and stock C accounts for the rest with beta 20% higher than market average. What is the systematic risk of such portfolio?

Answer 1

1.03

Step-by-step explanation:

The computation of the systematic risk of portfolio is shown below:

Since Stock B accounts for 10% with beta 50% lower than market beta and stock C accounts for the rest with beta 20% higher than market average

which means

Stock A Market Average Beta = 1

Stock B = = 1 × 0.5

= 0.5

And Stock C =1.2 × 1

= 1.2

Now

Stock A Weight = 50%, Beta = 1

Stock B Weight = 10% , Beta = 0.5

And Stock C = 40% and Beta = 1.2

So,

Weighted Average Beta of the Portfolio = Systematic Risk of the Portfolio i.e

= 0.5 × 1 + 0.1 × 0.5 + 0.4 × 1.2

= 1.03