You own a portfolio with Stocks A and B. The betas of the stocks are 0.9 and 1.1, respectively. You sell a portion of your position in Stock A and short sell Stock C with a beta of 1.3.
A) The beta of the new portfolio will increase.
B) The beta of the new portfolio will decrease.
C) The beta of the new portfolio will remain the same.
D) The beta of the new portfolio will remain the same or increase.
E) The beta of the new portfolio will remain the same or decrease.

Question

Quizplus · Accepted Answer

Selling a portion of Stock A will decrease the weight of the lower beta stock in the portfolio, while short selling Stock C with a higher beta will increase the weight of a higher beta stock. This will result in a new portfolio with a higher beta. Therefore, option A is incorrect. However, since we are short selling a stock with a higher beta, it is possible that the beta of the new portfolio may not increase as much as expected. Hence, option D is incorrect, and the correct answer is option B. Option C and E are also incorrect because the beta of the new portfolio is likely to change due to the change in the weights of the stocks.

You Own a Portfolio with Stocks a and B