Suppose you hold a diversified portfolio consisting of a $10,000 investment in each of 12 different common stocks.The portfolio's beta is 1.25.Now suppose you decided to sell one of your stocks that has a beta of 1.00 and use the proceeds to buy a replacement stock with a beta of 1.34.What would be the portfolio's new beta?
A)1.15
B)1.21
C)1.28
D)1.34

Question

Quizplus · Accepted Answer

The first step is to calculate the current total value of the portfolio, which is:

$10,000 x 12 = $120,000

Next, we need to calculate the current beta of the portfolio. Since all stocks have an equal investment, we can use a simple average of the betas:

(1.25 x 12) / 12 = 1.25

Now, we can calculate the beta of the portfolio after selling the stock with a beta of 1.00 and buying the new one with a beta of 1.34. Since we are only replacing one stock, the total value of the portfolio remains the same at $120,000. The new beta can be calculated as follows:

[ (1.25 x 12) - 1.00 + 1.34 ] / 12 = 1.28

Therefore, the answer is C) 1.28.

Suppose You Hold a Diversified Portfolio Consisting of a $10,000