You own a portfolio equally invested in a risk-free asset and two stocks.If one of the stocks has a beta of 1.86 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?
A)1.07
B).54
C)1.14
D).14
E).97

Question

Quizplus · Accepted Answer

The beta of the portfolio is the weighted average of the betas of the individual assets. Since the portfolio is equally invested in three assets, the beta of the portfolio is:Beta of portfolio = (1/3) * (0 + 1.86 + Beta of other stock)Since the portfolio is equally as risky as the market, the beta of the portfolio is 1.0. Therefore, we have:1.0 = (1/3) * (0 + 1.86 + Beta of other stock)Solving for the beta of the other stock, we get:Beta of other stock = 1.0 - (1/3) * (0 + 1.86) = 1.14

You Own a Portfolio Equally Invested in a Risk-Free Asset