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)2.97
D)1.96
E)2.30

Question

Quizplus · Accepted Answer

Since the portfolio is equally as risky as the market, its beta must be 1. Therefore:

1 = (1/3) * 0 + (1/3) * 1.04 + (1/3) * beta

Solving for beta yields:

beta = 1.96

Therefore, the beta of the other stock in the portfolio must be 1.96 to make the portfolio equally as risky as the market. Choice (D) is the correct answer.

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