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23 September, 11:22

You own a portfolio that has a total value of $130,000 and a beta of 1.28. You have another $49,000 to invest and you would like the beta of your portfolio to decrease to 1.18. What does the beta of the new investment have to be in order to accomplish this

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  1. 23 September, 11:45
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    Answer:βB = 0.9147=beta of new investment

    Explanation:

    Total investment = $130,000 + $49,000 = $179,000

    Using

    Portfolio beta (βp) = wA * βA + wB * βB

    Where βp is the portfolio beta coefficient,

    wA is the weight of the first investment,

    βA is the beta coefficient of first investment;

    wB is the weight of the second investment,

    βB is the beta coefficient of second investment

    but weight of investment is stock value / total investment x 100

    wA = 130,000 / 179,000X 100=72.63%

    WB = 49,000/179,000 X100=27.374%

    Portfolio beta (βp) = wA * βA + wB * βB

    1.18 = (72.63%*1.28) + (27.374% XβB)

    1.18=0.9296+0.27374βB

    βB i = (1.18-0.9298) / 0.27374

    βB = 0.9147=beta of new investment
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