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    Portfolio : Beta Coefficient

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    Suppose you are managing a portfolio, consists of 20 stocks. The beta of your portfolio is 1.65. You decide to sell five stocks from your portfolio: the beta of those five stocks was 2.00. You are also thinking to purchase 10 additional stocks, with a combined beta of 1.05, to replace the stocks you are selling. All stocks are of equal weights in your portfolio, both before and after these transactions. ( Hint: each stock weighs 5% before and 4% after the transactions)

    a) After selling the stocks from the portfolio, what would be the total beta of the remaining stocks in your portfolio?

    b) What would be the beta of your portfolio if you purchase the new stocks and put it in your portfolio?

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    Solution Preview

    a) The 5 stocks to be sold have a beta = 2
    and the weight is 5/20 = 25%
    Then the rest weighted beta is 1.65 - 2*25% = 1.15
    So the ...

    Solution Summary

    Beta coefficient is investigated.