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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

PORTFOLIO BETA An individual has $35,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a beta of 1.4. If these are the only two investments in her portfolio, what is her portfolio’s beta?

Summary Introduction

To determine: The portfolio’s beta.

Portfolio Beta: The portfolio beta is a measure of the volatility of portfolio. It measures how the stock moves in the market. A high portfolio shows that securities are more volatile in the price movements while a low beta represents that securities are less volatile in the price movements.

Explanation

Given,

The first investment is $35,000.

The beta on the first investment is 0.8.

The second investment is $40,000.

The beta on the second investment is 1.4.

Compute the portfolio beta.

The formula to calculate the portfolio beta is,

Portfolio'sbeta=Portfolio'sweight×Beta=(Weight1×Beta1+Weight2×Beta2)

Substitute 0.8 for beta 1, 0.4667 for weight 1, 1.4 for beta 2 and 0.5333 for weight 2.

Portfolio'sbeta=(0.4667×0.8)+(0

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