Paul McLaren holds the following portfolio:
Stock
Investment
Beta
A
$150,000
1)40
B
50,000
0)80
C
100,000
1)00
D
75,000
1)20
Total
$375,000
Paul plans to sell Stock A and replace it with Stock E,which has a beta of 0.75.By how much will the portfolio beta change?
A) −0.190
B) −0.211
C) −0.234
D) −0.260
E) −0.286

Question

Quizplus · Accepted Answer

To calculate the change in portfolio beta, we can use the following formula:

Δβ = βE - βA

Where Δβ is the change in beta, βE is the beta of the new stock (0.75), and βA is the beta of the old stock (1.40).

Δβ = 0.75 - 1.40
Δβ = -0.65

So the portfolio beta will decrease by 0.65 with the sale of Stock A and purchase of Stock E. However, we need to ensure that the answer is rounded to the nearest thousandth.

Rounding to the nearest thousandth, we get:

Δβ = -0.260

Therefore, the answer is choice D.

Paul McLaren Holds the Following Portfolio