You hold a diversified portfolio consisting of many different common stocks with a total market value of $100,000. The portfolio beta is equal to 1.15. You have decided to sell one of your stocks, a lead mining stock whose beta is equal to 0.7, for $10,000 net and to use the proceeds to buy $10,000 of stock in a steel company whose beta is equal to 2.3. What will be the new beta of the portfolio? (Round to two digit decimal places, e. g., 1.15)

Question

Joker

Business

14 May, 20:30

You hold a diversified portfolio consisting of many different common stocks with a total market value of $100,000. The portfolio beta is equal to 1.15. You have decided to sell one of your stocks, a lead mining stock whose beta is equal to 0.7, for $10,000 net and to use the proceeds to buy $10,000 of stock in a steel company whose beta is equal to 2.3. What will be the new beta of the portfolio? (Round to two digit decimal places, e. g., 1.15)

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Lorelei Pruitt · Answer 1

The new beta of the portfolio is 1.31

Explanation:

The computation of the new beta portfolio is equal to

= Portfolio beta - (selling Beta * net value : total market value) + (purchase beta * net value : total market value)

= 1.15 - (0.7 * $10,000 : $100,000) + (2.3 * $10,000 : $100,000)

= 1.15 - 0.07 + 0.23

= 1.31

For computing the accurate value we add the purchase beta and deduct the selling beta from the portfolio beta.