A portfolio consists of two stocks and has a beta of 1.20. The first stock has a beta of 1.02 and comprises 30% of the portfolio. What is the beta of the second stock?
A).41
B).66
C).82
D)1.28
E)1.35

Question

Quizplus · Accepted Answer

We can use the following formula to calculate the portfolio beta:
Portfolio beta = (Weight of stock 1 x Beta of stock 1) + (Weight of stock 2 x Beta of stock 2)
Given:
Portfolio beta = 1.20
Weight of stock 1 = 30%
Beta of stock 1 = 1.02
Let the beta of stock 2 be x.
Therefore,
Weight of stock 2 = 70%
Beta of stock 2 = x
Plugging these values into the formula, we get:
1.20 = (0.30 x 1.02) + (0.70 x x)
1.20 = 0.306 + 0.7x
0.894 = 0.7x
x = 1.28
Therefore, the beta of the second stock is 1.28, which is option D.

A Portfolio Consists of Two Stocks and Has a Beta