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Ch 13 Extra Portfolio Problem

# Ch 13 Extra Portfolio Problem - the remaining 19 stocks...

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Ch. 13 Portfolio Problem

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You hold a diversified portfolio of \$7,500  each in 20 different stocks.  The  portfolio beta is 1.12.  You want to sell  one stock with a beta of 1 for \$7,500  and purchase another stock with a beta  of 1.75.  What is your portfolio’s new  beta?
Portfolio size: 20 stocks at \$7,500 = \$150,000. Each stock is 7500/150000 = 1/20 = 0.05 of the portfolio. So, if one stock has a weight of 0.05, then

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Unformatted text preview: the remaining 19 stocks must have a weight of 142,500/150,000 = 19/20 = 0.95 portfolio 1 2 n n w w w 1 2 β = β + β + . .. β old portfolio rest of portfolio 7500 142500 1 150000 150000 x β = + β old portfolio rest of portfolio 0.05 1 0.95 x β = + β • Solve for beta of the old portfolio: • 1.12 – 0.05 = 1.07 = .95β • β = 1.1263 • New portfolio beta: • β = .05 x 1.75 + 0.95 x 1.1263 = 1.16...
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Ch 13 Extra Portfolio Problem - the remaining 19 stocks...

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