You hold a diversified portfolio consisting of $1,000 investment in each of 10 different stocks. The portfolio has a beta of 0.8. You have decided to sell one of your stocks that has a beta equal to 1.1 for $1,000. You will purchase $1,000 of a new stock with a beta of 2.5. After these two transactions (sell and buy), what will be the beta of the new portfolio?
A) 1.1
B) 0.99
C) 0.87
D) 0.94

Question

Quizplus · Accepted Answer

The initial portfolio beta is 0.8. Removing a stock with beta 1.1 and adding one with beta 2.5 changes the portfolio beta to 0.94.

You Hold a Diversified Portfolio Consisting of $1,000 Investment in Each