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Homework answers / question archive / Suppose Stan holds a portfolio consisting of a $10,000 investment in each of 8 different common stocks
Suppose Stan holds a portfolio consisting of a $10,000 investment in each of 8 different common stocks. The portfolio's beta is 1.25. Now suppose Stan decided to sell one of his stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 0.74. What would the portfolio's new beta be?
Computation of the portfolio's new beta:-
Portfolio's new beta = Portfolio beta - (Weight * Beta of sold stock) + (Weight * Beta of purchase stock)
= 1.25 - ((1/8) * 1) + (((1/8) * 0.74))
= 1.25 - 0.125 + (0.125 * 0.74)
= 1.25 - 0.125 + 0.093
= 1.22
