Suppose Stan holds a portfolio consisting of a $10,000 investment in each of 8 different common stocks.The portfolio's beta is 1.25.Now suppose Stan decided to sell one of his stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.35.What would the portfolio's new beta be?
A) 1.17
B) 1.23
C) 1.29
D) 1.36
E) 1.43

Question

Quizplus · Accepted Answer

The formula for the new portfolio beta after a change in the portfolio is:

New Beta = Old Beta - (Beta of sold stock * (Value of sold stock / Total portfolio value)) + (Beta of replacement stock * (Value of replacement stock / Total portfolio value))

Plugging in the values:

New Beta = 1.25 - (1.00 * (10,000 / 80,000)) + (1.35 * (10,000 / 80,000))
New Beta = 1.29

Therefore, the portfolio's new beta would be 1.29 after selling the stock with a beta of 1.00 and buying a replacement stock with a beta of 1.35.

Suppose Stan Holds a Portfolio Consisting of a $10,000 Investment