You’ve collected data on the betas of various mutual funds, Each fund and its be

Question

You’ve collected data on the betas of various mutual funds, Each fund and its beta is listed below.

Mutual fund                   Beta A

Weak Fund                   0.23

Fido Fund                     0.77

Vanwatch                      1.05

Temper                         1.33

Estimate the beta of your fund holdings if you held equal proportions of each of the above funds.

Estimate the beta of your fund holdings if you had 20 percent of your investments in the Weak fund, 40 percent in Fido, 15 percent in Vanwatch and the remainder in Temper.

Explanation / Answer

Beta of a portfolio is the weighted average Beta of the stock contained in it. Thus,

1. Beta = (0.23 + 0.77 + 1.05 + 1.33) x 0.25 = 0.845 or 0.85

2. Beta = (0.23 x 20%) + (0.77 x 40%) + (1.05 x 15%) + (1.33 x 25%) = 0.844 or 0.84

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