Nancy Jordan has an investment portfolio of 30 stocks with a total value of $125,000

Finance Apr 01, 2021

Nancy Jordan has an investment portfolio of 30 stocks with a total value of $125,000. The total portfolio has a beta of 1.4. She wants to invest an inheritance of $20,000 into one stock with a beta of 0.7. After Nancy adds the new stock, what will be the portfolio's beta?

Expert Solution

Computation of Beta of New Portfolio:

Beta of a Portfolio = Weighted Average

where weights are based on the market value of each stock

Given,

Beta of the portfolio = 1.4

Value of the Portfolio = $125,000

New Stock Beta = 0.7

Stock Value = $20,000

Beta of the New Portfolio = (Existing Portfolio Beta * Existing Portfolio Value + New Stock Beta * New Stock Beta) / Existing Value of Portfolio + Value of New Stock

= ($125,000 * 1.4 + 20,000 * 0.7) / 125,000 + 20,000

= ($175,000 + 14,000) / 145,000

= 189,000 /145,000

= 1.30

So, Beta of New Portfolio is 1.30

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