Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40. Stock A comprises 15 percent of the dollar value of her holdings and has a beta of 1.0. If Nicole sells all of her investment in A and invests the proceeds in the risk-free asset, her new portfolio beta will be ________.
A) 0.60
B) 0.88
C) 1.00
D) 1.25

Question

Quizplus · Accepted Answer

When Nicole sells Stock A and invests in the risk-free asset (beta = 0), the portfolio beta is recalculated by removing Stock A's contribution. The new portfolio beta is 1.40 - (0.15 * 1.0) = 1.25.

Nicole Holds Three Stocks in Her Portfolio: A, B, and C