The Beta of Portfolio C is greater than the Beta of the Exchange Traded Fund wit
ID: 2627606 • Letter: T
Question
The Beta of Portfolio C is greater than the Beta of the Exchange Traded Fund with the symbol SPY.
Portfolio C (PLEASE EXPLAIN HOW YOU GET THE ANSWERS)
Beta
stock
weight
1
A
0.05
1.1
B
0.05
1.2
C
0.1
0.67
D
0.7
0.89
E
0.1
2) Portfolio A
Beta
stock
weight
1
A
0.3
1.1
B
0.1
1.2
C
0.1
0.67
D
0.3
0.89
E
0.2
Portfolio A has 0 idiosyncratic risk.
True or false
3)
Portflio A has more market risk than the S&P 500. (Use Yahoo Finance as your source).
True or false
4)
The Beta of portfolio A is .890.
True or false
5)
The Beta of portflio A is greater than 1.
Portfolio A
True or false
6)
Portfolio A
Portfolio B
Beta
stock
weight
Beta
stock
weight
1
A
0.3
1
A
0.3
1.1
B
0.1
1.3
B
0.1
1.2
C
0.1
1.5
C
0.1
0.67
D
0.3
1.2
D
0.3
0.89
E
0.2
1.4
E
0.2
Portfolio B is riskier than portfolio A if we measure risk by the Beta of the portfolio.
true or false
Portfolio C (PLEASE EXPLAIN HOW YOU GET THE ANSWERS)
Beta
stock
weight
1
A
0.05
1.1
B
0.05
1.2
C
0.1
0.67
D
0.7
0.89
E
0.1
Explanation / Answer
1. Beta is the weighted average of the stock beta's.
Beta of portfolio C = 0.05*1+0.05*1.1+0.1*1.2+.7*0.67+0.1*0.89 = 0.783
Beta of SPY as per yahoo finance = 1
Thus, False as portfolio C has a lower Beta
2. Idiosyncratic risk is the risk which can be reduced through diversification. Research has shown that around 20-30 stocks portfolio are ideal to reduce risk through diversification. Even then, it will not be exactly 0. Thus, Portfolio A cannot have 0 idiosyncratic risk. False
3. Beta of Portfolio A = 0.3*1+0.1*1.1+0.1*1.2+0.3*0.67+0.2*0.89 = 0.909
By definition market Beta is 1 and we can expect S&P 500 to be close to 1 if not 1. Thus, portfolio A has lower Beta than S&P 500. False
4. False. Portfolio A's beta is 0.909
5. False. Portfolio A's beta is less than 1
6. Portfolio A's beta = 0.3*1+0.1*1.1+0.1*1.2+0.3*0.67+0.2*0.89 = 0.909
Portfolio B's beta = 0.3*1+0.1*1.3+0.1*1.5+0.3*1.2+0.2*1.4 = 1.22
Thus Portfolio B's beta is higher than that of A and therefore, riskier. True
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