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Safiye the Investor, has $25,000 invested in Stock X with a beta of 0
Safiye the Investor, has $25,000 invested in Stock X with a beta of 0.6 and another $75,000 invested in Stock Y with a beta of 2.5. If these are the only two stocks in Safiye’s portfolio, what is her portfolio’s beta?
Expert Solution
The formula to calculate beta of a portfolio is
Bp = Wa*Ba + Wb*Bb
Where Bp is the beta of the portfolio
Ba and Bb are the betas of stock A and Stock B in the portfolio
Now, Total value of the portfolio is 25,000 + 75,000 = 1,00,000
Wa = 25,000/1,00,000 = 0.25
Wb = 75,000/1,00,000 = 0.75
Hence now Bp = 0.25 * 0.6 + 0.75*2.5
Bp = 0.15 + 1.875
Bp = 2.025
hence the beta of the portfolio is 2.025
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