What is the beta of a portfolio if 40% of the funds are invested in a risk-free asset and the balance of the funds is invested in the market portfolio?
A)0.4
B)0.6
C)0.8
D)1.0

Question

Quizplus · Accepted Answer

The formula to calculate the beta of a portfolio is:

Beta of Portfolio = Weight of Risky Assets x Beta of Risky Assets

In this case, 40% of the funds are invested in a risk-free asset and the balance is invested in the market portfolio. Since the risk-free asset has a beta of 0, the beta of the portfolio will be:

Beta of Portfolio = 0.6 x Beta of Market Portfolio

The weight of risky assets is 60% (100% - 40%) and the beta of the market portfolio is 1. Therefore, the beta of the portfolio will be:

Beta of Portfolio = 0.6 x 1 = 0.6

Therefore, the answer is B (0.6).

What Is the Beta of a Portfolio If 40% of the Funds