Port Company is financed entirely by equity and has three divisions. Division A is the stable products division, and has a beta of 0.8. Division B takes only projects with the same risk as the market portfolio. Division C is the research and development division, where the average beta of projects taken is 1.6. The firm's assets are divided equally (both in terms of market value and book value) among the three divisions. What is the beta of the firm?
A) 0.80
B) 1.00
C) 1.03
D) 1.13
E) 1.33

Question

Quizplus · Accepted Answer

The beta of the firm can be calculated as the weighted average of the betas of its divisions. Since the firm's assets are divided equally among the three divisions, each division contributes equally to the firm's overall beta. Therefore, the firm's beta is the average of the three divisional betas: (0.8 + 1.0 + 1.6) / 3 = 1.13.

Port Company Is Financed Entirely by Equity and Has Three