A portfolio whose current value of dolar 100,000 consist of three assets, call t

Question

A portfolio whose current value of dolar 100,000 consist of three assets, call these assets as 1,2and 3 and the composition of the portfolio is 10percentage,20 percentage and 70percentage in assets 1,2 and 3 respectively. Suppose the investor wants to rebalance her portfolio by increasing the weight of the second assets from 20 percentage to 30 percentage,and simultaneously reducing the weight of the third asset from 70percentage t0 50 percentage.She does not want any change in the current level of portfilio beta that is,she wants beta of the rebalanced portfolio the same as beta of the original portfilio.

Explanation / Answer

a) beta of rebalance portfolio is same as original portfolio

thus (1*0.1) + (1.5*0.2) + (B3*0.7) = (1*0.2) + (1.5*0.3) + (B3*0.5)

B3 = 1.25

b) The expected return does not change since rebalance portfolio has same beta as original

c) beta of original portfolio = (1*0.1) + (1.5*0.2) + (1.25*0.7) = 1.275

Beta of new portfolio = (1*0.2) + (1.5*0.3) + (1.25*0.5) = 1.275

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.