Paul McLaren holds the following portfolio: $$\begin{array} { c r r }
\text { Stock } & \text { Investment } & \text { Beta } \
\hline \text { A } & \$ 150,000 & 1.40 \
\text { B } & 50,000 & 0.80 \
\text { C } & 100,000 & 1.00 \
\text { D } & 75,000 & 1.20 \
\text { Total } & \underline{\$ 375,000} &
\end{array}$$ Paul plans to sell Stock A and replace it with Stock E,which has a beta of 0.75.By how much will the portfolio beta change?
A)?0.190
B)?0.211
C)?0.234
D)?0.260
E)?0.286

Question

Paul McLaren holds the following portfolio: $$\begin{array} { c r r } 
\text { Stock } & \text { Investment } & \text { Beta } \
\hline \text { A } & \$ 150,000 & 1.40 \
\text { B } & 50,000 & 0.80 \
\text { C } & 100,000 & 1.00 \
\text { D } & 75,000 & 1.20 \
\text { Total } & \underline{\$ 375,000} &
\end{array}$$ Paul plans to sell Stock A and replace it with Stock E,which has a beta of 0.75.By how much will the portfolio beta change?
A)?0.190
B)?0.211
C)?0.234
D)?0.260
E)?0.286

Quizplus · Accepted Answer

To calculate the change in portfolio beta, we can use the following formula:

Change in portfolio beta = Beta of new stock x (Amount invested in new stock / Total portfolio value) - Beta of old stock x (Amount invested in old stock / Total portfolio value)

Plugging in the values, we get:

Change in portfolio beta = 0.75 x (150,000/375,000) - 1.4 x (150,000/375,000)
                      = -0.3 + 0.14
                      = -0.16

Therefore, the change in portfolio beta will be -0.16 or -0.260 (rounded to three decimal places), which is option D.

Paul McLaren Holds the Following Portfolio Paul Plans to Sell Stock a and Replace It with r