Question

10. You own a portfolio with 40% invested in a risk-free asset, 20% in stock A with a beta of 1.7 and 40% in stock B. Your portfolio has the same expected return as the market portfolio. What is the beta of stock B? (The risk-free rate is 5%). a. 0.43 b. 1.00 c. 1.65 d. 1.85 e. 2.75

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Answer 1

Since, my portfolio has the same expected returns as the market portfolio, the beta of my portfolio will be 1.

So, the portfolio beta can be calculated as,

Weight of security A * beta of A + weight of security B * beta of B = 1

So, 0.2* 1.7 + 0.4* X = 1

So, the beta of B is = 1.65

So, the correct option is option C.