Suppose you hold a portfolio consisting of a $10,000 investment in each of 8 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 to use the proceeds to buy a replacement stock with a beta of 1.55. What would the portfolio's new beta be? Do not round your intermediate calculations.

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Asked Nov 22, 2019
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Suppose you hold a portfolio consisting of a $10,000 investment in each of 8 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 to use the proceeds to buy a replacement stock with a beta of 1.55. What would the portfolio's new beta be? Do not round your intermediate calculations.

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Expert Answer

Step 1

Considering equal investment in each of the eight stocks of a portfolio, weight for each stock can be calculated as below:

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$10,000 Amount in each stock =S1,250 $1250 Weights of each stock $10,000 =0.125

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Step 2

Portfolio beta is the weighted sum of each stock’s beta, therefore, change in portfolio beta is:

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Change in portfolio beta = weightx (change in stock beta) 0.125x(1.55-1) 0.125x0.55 0.06875

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Step 3

New portfolio beta is , old beta plus change in po...

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New beta Portfolio beta + change in portfolio beta - 1.25+0.06875 1.31875

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