An investor has $5,000 invested in a stock which has an estimated beta of 1.2, and another $15,000 invested in the stock of the company for which she works. The risk-free rate is 6 percent and the market risk premium is also 6 percent. The investor calculates that the required rate of return on her total ($20,000) portfolio is 15 percent. What is the beta of the company for which she works?
A) 1.6
B) 1.7
C) 1.8
D) 1.9
E) 2.0

Question

Quizplus · Accepted Answer

The correct answer is A.The beta of the company for which she works can be calculated using the following formula:Beta of portfolio = (Weight of stock 1 * Beta of stock 1) + (Weight of stock 2 * Beta of stock 2)15% = (5,000/20,000 * 1.2) + (15,000/20,000 * Beta of stock 2)15% = 0.06 + 0.75 * Beta of stock 2Beta of stock 2 = (15% - 0.06) / 0.75Beta of stock 2 = 1.6

An Investor Has $5,000 Invested in a Stock Which Has