Suppose you hold a diversified portfolio consisting of ...



Suppose you hold a diversified portfolio consisting of $10,000 invested equally in each of 10 different common stocks. The portfolio’s beta is 1.120. Now suppose you decided to sell one of your stocks that has a beta of 1.000 and to use the proceeds to buy a replacement stock with a beta of 1.750. What would the portfolio’s new beta be?

We need to calculate the beta of the portfolio’s nine stocks that we are keeping.  These nine represent 90% of the total value of the portfolio and 90% of the beta:

.9x + .1(1.00) = 1.120

.9x = 1.02

x = 1.1333

If we add one stock with a beta of 1.75, we get:

.9(1.1333) + .1(1.75) = 1.02 + .175 = 1.195

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download