Portofolio's new beta
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Suppose you hold a diversified portfolio consisting of a $7,500 investment in each of 20 different common stocks. The portfolio beta is equal to 1.12. Now, suppose you have decided to sell one of the stocks in your portfolio with a beta equal to 1.0 for $7,500, and use these proceeds to buy another stock for your portfolio. Assume the new stock's beta is equal to 1.75. Calculate your portfolio's new beta.
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Solution contains calculations of portfolio's new beta.
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Portfolio beta is the weighted average of the beta of individual stocks in portfolio
Weights given to each stock is depends on the dollar investment in the stock and calculated as Investment in the stock/Total investment. Therefore we have following equation
Portfolio beta = weight of stock 1*beta of stock 1 + weight of stock 2*beta of stock 2 + ................. + weight of stock n*beta of stock n
In this example
Portfolio beta ...
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