You own a portfolio which is invested equally in two stocks and a risk-free security.The stock betas are .89 for Stock A and 1.26 for Stock B.Which one of the following will increase the portfolio beta,all else constant?
A) increasing the amount invested in the risk-free security
B) decreasing the weight of Stock B and increasing the weight of Stock A
C) replacing Stock A with a security that has a beta of .77
D) increasing the weight of Stock A and decreasing the weight of the risk-free security
E) replacing Stock B with Stock C,which has a beta equal to that of the market

Question

Quizplus · Accepted Answer

To increase the portfolio beta, we need to increase the weight of the stock with a higher beta (in this case, Stock B) and decrease the weight of the risk-free security. Therefore, option D is the best choice as it increases the weight of Stock A (with beta less than 1) and decreases the weight of the risk-free security without affecting the weight of Stock B. The other options either decrease the portfolio beta or have no effect on the portfolio beta.

You Own a Portfolio Which Is Invested Equally in Two