You currently own a portfolio valued at $80,000 that is equally as risky as the market. Given the information below, what is the beta of stock C?
A) 0.91
B) 0.95
C) 1.04
D) 1.13
E) 1.18

Question

You currently own a portfolio valued at $80,000 that is equally as risky as the market. Given the information below, what is the beta of stock C? 
A) 0.91 
B) 0.95 
C) 1.04 
D) 1.13 
E) 1.18

Quizplus · Accepted Answer

We can use the asset pricing model to solve for the beta of stock C:

Expected return on the portfolio = Risk-free rate + Beta of the portfolio * (Expected return on the market - Risk-free rate)

Assuming the risk-free rate is 2.5% and the expected return on the market is 10%, and since the portfolio is equally risky as the market, we can solve for the beta of the portfolio:

8% = 2.5% + beta * (10% - 2.5%)

Solving for beta, we get beta = 1.04.

Therefore, the best choice is C.

You Currently Own a Portfolio Valued at $80,000 That Is