You own a portfolio which is invested equally in two stocks and a risk-free security.The stock betas are 0.89 for Stock A and 1.26 for Stock B.Which one of the following will increase the portfolio beta,all else constant?
A) increasing the amount invested in the risk-free security
B) decreasing the weight of Stock B and increasing the weight of Stock A
C) replacing Stock A with a security that has a beta of .77
D) increasing the weight of Stock A and decreasing the weight of the risk-free security
E) replacing Stock B with Stock C, which has a beta equal to that of the market

Question

Quizplus · Accepted Answer

Increasing the weight of Stock A and decreasing the weight of the risk-free security will increase the portfolio beta. This is because Stock A has a positive beta, so increasing the weight of Stock A will increase the overall beta of the portfolio. The risk-free security has a beta of zero, so decreasing its weight will also increase the overall beta of the portfolio. The other options either have no effect on the portfolio beta or may even decrease it.

You Own a Portfolio Which Is Invested Equally in Two