Fundamentals of Financial Manageme...
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Fundamentals of Financial Manageme...
PORTFOLIO BETA An individual has $20,000 invested in a stock with a beta of 0.6 and another $75,000 invested in a stock with a beta of 2.5. If those are the only two investments in her portfolio, what is her portfolio’s beta?
To determine: The portfolio’s beta.
Portfolio Beta:
The portfolio beta is a measure of the portfolio’s volatility. 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.
Given,
The first investment is $20,000.
The beta on the first investment is 0.6.
The second investment is $75,000.
The beta on the second investment is 2.5.
Compute the portfolio beta
The formula to calculate the portfolio beta is,
Substitute 0.6 for beta 1, 0.2105 for weight 1, 2.5 for beta 2 and 0.7895 for weight 2.
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