Question

Q1. (RWJ 11-11) You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.61 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

Answer 1

Weight of each=(1/3)

Portfolio beta=Respective beta*Respective weight

1=(1.61*1/3)+(Beta of other stock*1/3)+(0*1/3)Beta of market=1;Beta of risk-free assets=0]

1=0.5367+(Beta of other stock*1/3)

Beta of other stock=(1-0.5367)*3

=1.39