You own a portfolio equally invested in a risk-free asset and two stocks. If one

Question

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.11 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio? (Round your answer to 2 decimal places. (e.g., 32.16))

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.11 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio? (Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Each stock has equal weight 33.33%.

Portfolio Beta = (weight asset 1 * Beta 1) + (weight asset 2 * Beta 2) + (weight risk free asset * Beta risk free asset).

Portfolio beta is always equals to 1.

1 = (0.3333 * B1) + (0.3333 * 1.11) + 0
B1 = 1.89 which is the beta of other stock.

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