Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds.If the $\sigma$ of your portfolio was 0.20 and $\sigma$_M was 0.16, the $\beta$ of the portfolio would be approximately A)0.64. B)0.80. C)1.25. D)1.56.

Question

Quizplus · Accepted Answer

The formula for the beta of a portfolio using the single index model is: βportfolio = (covariance of portfolio with market / variance of market) Using the given information: covariance of portfolio with market = F1F1F1S1σF1F1F10 = 0.20 variance of market = F1F1F1S1σF1F1F10_M = 0.16 Therefore, βportfolio = 0.20 / 0.16 = 1.25 So, the best choice is C.

Suppose You Held a Well-Diversified Portfolio with a Very Large σ\sigmaσ

Suppose You Held a Well-Diversified Portfolio with a Very Large $\sigma$