Jim Bowles is an investor who believes the economy is gaining strength and therefore wishes to increase the risk of his 14-security portfolio. Each security has a current market value of $5,000, and the current beta of the portfolio is 1.02. The beta of the least risky security is 0.76. If Jim replaces the least risky security with another security with the same market value but a beta of 1.45, what will the portfolio beta be then?

Question

Quizplus · Accepted Answer

The portfolio beta is calculated as the weighted average of the individual security betas. Replacing the least risky security with a higher beta security increases the overall portfolio beta. The new portfolio beta is calculated as follows: New Portfolio Beta = (Current Portfolio Beta * 14 - Beta of Least Risky Security + Beta of New Security) / 14 = (1.02 * 14 - 0.76 + 1.45) / 14 = 1.07.

Jim Bowles Is an Investor Who Believes the Economy Is