You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.04 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?
A) 1.37
B) 1.54
C) 1.96
D) 2.30
E) 2.97

Question

Quizplus · Accepted Answer

The portfolio's beta is 1 (as it is equally as risky as the market). With equal investment in a risk-free asset (beta = 0), stock 1 (beta = 1.04), and stock 2 (unknown beta), the equation is: (0 + 1.04 + x) / 3 = 1. Solving for x gives x = 1.96.

You Own a Portfolio Equally Invested in a Risk-Free Asset