Suppose Stan holds a portfolio consisting of a $10,000 investment in each of 8 different common stocks

Finance Oct 20, 2020

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?

Expert Solution

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

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