Question

Rhody Investments has a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively.

What is your portfolio beta?

Answer 1

The portfolio beta is 1.048.

Step-by-step explanation:

The portfolio beta is the measure of systematic risk for the whole portfolio. It is made up of the weighted average of the individual stock betas that form up the portfolio.

The weightage of stocks in portfolio is determined by the investments in stock as a proportion of total investment in the portfolio. The formula for portfolio beta is,

p Beta = wA * Beta of A + wB * Beta of B + ... + wN * Beta of N

The investment in Con Edison = 50000 - 12000 - 20000 = 18000

Using the above formula, we calculate the portfolio beta to be,

p Beta = 20000/50000 * 1.3 + 12000/50000 * 1 + 18000/50000 * 0.8

p Beta = 1.048