   Chapter 8, Problem 2P Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

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?

Summary Introduction

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.

Explanation

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,

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

Substitute 0.6 for beta 1, 0.2105 for weight 1, 2.5 for beta 2 and 0.7895 for weight 2.

Portfolio'sbeta=(0.2105×0.6)+(0

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