You hold a diversified portfolio consisting of a $10,000 investment in each of 20 different common stocks . The portfolio beta is equal to 1.2. You have decided to sell one of your stocks which has a beta equal to 0.7 for $10,000. You plan to use the proceeds to purchase another stock which has a beta equal to 1.4. What will be the beta of the new portfolio?
A) 1.165
B) 1.235
C) 1.250
D) 1.284
E) 1.333

Question

Quizplus · Accepted Answer

The new portfolio beta is calculated by adjusting the original portfolio beta for the change in investment. The original portfolio beta is 1.2. Removing a stock with beta 0.7 and adding a stock with beta 1.4 changes the portfolio beta to 1.235.

You Hold a Diversified Portfolio Consisting of a $10,000 Investment