Steve Brickson currently has an investment portfolio that contains four stocks with a total value equal to $80,000. The portfolio has a beta (β) equal to 1.4. To earn higher returns, Steve wants to invest an additional $20,000 in a stock that has β equal to 2.4. After Steve adds the new stock to his portfolio, what will the portfolio's beta be?
A)1.6
B)1.8
C)1.9
D)2.0
E)2.1

Question

Quizplus · Accepted Answer

The portfolio's new beta is calculated by taking a weighted average of the betas of the individual investments. Initially, the portfolio value is $80,000 with a beta of 1.4. Steve adds $20,000 of a stock with a beta of 2.4. The new total value of the portfolio is $100,000. The weighted average beta is calculated as follows: $((80,000/100,000) \times 1.4) + ((20,000/100,000) \times 2.4) = 0.8 \times 1.4 + 0.2 \times 2.4 = 1.12 + 0.48 = 1.6$.

Steve Brickson Currently Has an Investment Portfolio That Contains Four