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A portfolio contains equal investments in 10 stocks
A portfolio contains equal investments in 10 stocks. Four have a beta of 1.1; the remainder have a beta of 1.6. What is the portfolio beta?
A. 1.40
B. Greater than 1.40 because the portfolio is not completely diversified.
C. Less than 1.40 because diversification reduces beta.
D. None of the above
Expert Solution
Computation of Portfolio Beta:
Given,
Beta for 4 Stocks = 1.1
Beta for 6 Stocks = 1.6
Weight of 4 Stocks = 4/10 = 0.4
Weight of 4 Stocks = 6/10 = 0.6
Portfolio Beta = (1.1*0.4) + (1.6*0.6)
= 0.44 + 0.96
Portfolio Beta = 1.40
So, the correct option is A "1.40".
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