You currently own a portfolio valued at $56,000 that has a beta of 1.25. You have another $10,000 to invest and would like to invest it in a manner such that the portfolio beta decreases to 1.20. What does the beta of the new investment have to be?
A) 0.74
B) 0.79
C) 0.86
D) 0.92
E) 1.00

Question

Quizplus · Accepted Answer

We can use the formula for portfolio beta to solve for the beta of the new investment:

Portfolio beta = (value of first asset / total portfolio value) * beta of first asset + (value of second asset / total portfolio value) * beta of second asset

where the first asset is the current portfolio and the second asset is the new investment.

Plugging in the values we know, we get:

1.20 = (56000 / 66000) * 1.25 + (10000 / 66000) * new investment beta

Solving for new investment beta, we get:

new investment beta = (1.20 - (56000 / 66000) * 1.25) / (10000 / 66000) = 0.92

Therefore, the beta of the new investment needs to be 0.92 to decrease the portfolio beta to 1.20. The correct answer is D.

You Currently Own a Portfolio Valued at $56,000 That Has