If a two-stock portfolio is equally invested in stocks with Betas of 1.4 and 0.7, then the portfolio Beta is:
A)0.70.
B)1.05.
C)1.40.
D)2.10

Question

Quizplus · Accepted Answer

To calculate the portfolio Beta, we use the following formula:
Portfolio Beta = (Proportion of Investment in Stock 1 x Beta of Stock 1) + (Proportion of Investment in Stock 2 x Beta of Stock 2)
Since the portfolio is equally invested in both stocks, the proportion of investment in each is 0.5. 
Plugging in the numbers, we get:
Portfolio Beta = (0.5 x 1.4) + (0.5 x 0.7)
Portfolio Beta = 0.7 + 0.35
Portfolio Beta = 1.05
Therefore, the portfolio Beta is 1.05, which is Option B.

If a Two-Stock Portfolio Is Equally Invested in Stocks with Betas