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 .76
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

Increasing the weight of Stock A and decreasing the weight of the risk-free security will increase the portfolio beta as Stock A has a beta of .89 which is greater than the risk-free asset (beta = 0). All other options either decrease the portfolio beta or keep it constant.

You Own a Portfolio Which Is Invested Equally in Two