You have a portfolio consisting of 20% Boeing (beta = 1.3) and 40% Hewlett-Packard (beta = 1.6) and 40% McDonald's stock (beta = 0.7). How much market risk does the portfolio have?
A) This portfolio has 18% less risk than the general market.
B) This portfolio has 28% more risk than the general market.
C) This portfolio has 18% more risk than the general market.
D) This portfolio has 28% less risk than the general market.

Question

Quizplus · Accepted Answer

To calculate the market risk of the portfolio, we need to use the weighted average of the betas of the individual stocks.

Market Risk of the Portfolio = (Weight of Stock A x Beta of Stock A) + (Weight of Stock B x Beta of Stock B) + (Weight of Stock C x Beta of Stock C)

= (0.2 x 1.3) + (0.4 x 1.6) + (0.4 x 0.7) 
= 0.26 + 0.64 + 0.28 
= 1.18

Since the beta of the market is 1, this portfolio has 18% more risk than the general market (1.18-1 = 0.18 or 18%). Therefore, the correct answer is C.

You Have a Portfolio Consisting of 20% Boeing (Beta =