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Homework answers / question archive / You are forming a portfolio and are investing in 3 securities
You are forming a portfolio and are investing in 3 securities. You have the following information about the stocks you are investing in; Stock B has a beta of 105 and stock C has a beta of 0.80. The portfolio has a beta of 130. You invested 40% in stock A, 25% in stock B, and the remainder in stock C. What is the beta of stock A? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) 7 Beta Stock A
What is the weight invested in stock C? (Do not round intermediate calculations and display as a percentage, round your answer to 2 decimal places, e.g., 12.34%.) weight of stock
First, let's find the weight of stock C
Given: weight of stock A = 40%
weight of stock B = 25%
And, the remainder in stock C
So, the weight of stock C = 1 - weight of stock A - weight of stock B
Weight of stock C = 1 - 40% - 25%
Weight of stock C = 1 - 0.4 - 0.25
Weight of stock C = 0.35
Weight of stock C = 35%
Next, we will find the beta of Stock A
The beta of the portfolio is given to be 1.30
The equation for portfolio beta is:
Portfolio beta = Weight of Stock A * Beta of Stock A + Weight of Stock B * Beta of Stock B + Weight of Stock C * Beta of Stock C
Where,
Portfolio beta = 1.30
Weight of Stock A = 40% = 0.40
Weight of Stock B = 25% = 0.25
Beta of Stock B = 1.05
Weight of Stock C = 35% = 0.35
Beta of Stock C = 0.80
Substituting these value in the portfolio beta equation:
1.30 = 0.40 * Beta of Stock A + 0.25 * 1.05 + 0.35 * 0.80
1.30 = 0.40 * Beta of Stock A + 0.2625 + 0.28
1.30 = 0.40 * Beta of Stock A + 0.5425
0.40 * Beta of Stock A = 1.30 - 0.5425
0.40 * Beta of Stock A = 0.7575
Beta of Stock A = 0.7575/0.40
Beta of Stock A = 1.89375
Beta of Stock A = 1.89
