Assume that the single factor APT model applies and a portfolio exists such that 1/2 of the funds are invested in Security Q and the rest in the risk-free asset. Security Q has a beta of 1.8. The portfolio has a beta of:
A) 0.0.
B) 0.8.
C) 0.9.
D) 1.0.
E) 1.8.

Question

Quizplus · Accepted Answer

The portfolio beta is the weighted average of the betas of the securities in the portfolio. Since half of the portfolio is invested in the risk-free asset (which has a beta of 0), and the other half in Security Q (which has a beta of 1.8), the portfolio beta is (0.5 * 0) + (0.5 * 1.8) = 0.9.

Assume That the Single Factor APT Model Applies and a Portfolio