Sherrie Hymes holds a $200,000 portfolio consisting of the following stocks.The portfolio's beta is 0.875. $\begin{array}{crr}\text { Stock }&\text { Investment }&\text { Beta }\
\text { A } & \$ 50,000 & 0.50 \
\text { B } & 50,000 & 0.80 \
\text { C } & 50,000 & 1.00 \
\text { D } & 50,000 & 1.20 \
\text { Total } & \$ 200,000 &
\end{array}$ If Sherrie replaces Stock A with another stock, E, which has a beta of 1.50, what will the portfolio's new beta be?
A) 1.07
B) 1.13
C) 1.18
D) 1.24
E) 1.30

Question

Quizplus · Accepted Answer

The original portfolio beta is calculated as a weighted average of the individual stock betas. When Stock A (beta = 0.50) is replaced with Stock E (beta = 1.50), the new portfolio beta is recalculated. The calculation is as follows: $(0.25*1.50) + (0.25*0.80) + (0.25*1.00) + (0.25*1.20) = 1.125$, which rounds to 1.13, making choice B correct.

Sherrie Hymes Holds a $200,000 Portfolio Consisting of the Following