Jeanne Lewis is attempting to evaluate two possible portfolios consisting of the

Question

Jeanne Lewis is attempting to evaluate two possible portfolios consisting of the same five assets but held in different proportions. She is particularly interested in using beta to compare the risk of the portfolios and, in this regard, has gathered the following data: EEB a. Calculate the betas for portfolios A and B. b. Compare the risk of each porfolio to the market as well as to each other. Which portfolio is more risky? a. The beta of portiolio A is(Round to three decimal places.) The beta of portfolio B is J. (Round to three decimal places.) b. Portfolio s slightly less risky than the market average risk the drop-down menus.) while portfolio is more risky than the market Portfolio 's retum will move more than portfolio 's for a gven increase or decrease in market risk. Select from Poroliois the more risky portfolio. (Select from the drop-down menu.) Data Table Click on the icon located on the top-right corner of theata table in order to copy ts contents into a spreadsheet.) Portfolio Weights Asset Asset Beta Portfolio A Portfolio B 1.27 0.73 1.28 1.06 0.94 9% 30% 13% 10% 38% 100% 32% 6% 19% 22% 21% 100% Total Enter your answer in each of the answer boxes. PrintDone

Explanation / Answer

a) Beta of a portfolio is weighted average of the beta of the constitutents of the portfolio.

Beta of portfolio = Beta1 * W1 + Beta2 * W2 + ................ Beta n * Wn

Beta (A) = (1.27 * 9%) + (0.73 * 30%) + (1.28 * 13%) + (1.06 * 10%) + (0.94 * 38%)

Beta (A) = 0.1143 + 0.2190 + 0.1664 + 0.1060 + 0.3572 = 0.9629

So, Beta (A) = 0.963

Beta (B) = (1.27 * 32%) + (0.73 * 6%) + (1.28 * 19%) + (1.06 * 22%) + (0.94 * 21%)

Beta (B) = 0.4064 + 0.0438 + 0.2432 + 0.2332 + 0.1974 = 1.124

So, Beta (B) = 1.124

b) Beta is an indicator of market risk imbibed in a particular security. Higher beta implies higher market risk.

Market portfolio has Beta of 1. A security with Beta < 1 is less riskier than market portfolio. A security with Beta > 1 is more risky than market portfolio.

So, based on the this concept:

Portfolio A is slightly less risky than the market (average risk), while portfolio B is more risky than the market. Portfolio B's return would move more than the portfolio A's for a given increase or decrease in market risk.

Portfolio B is more risky portfolio.

Please do give your feedback if the above answer is correct and helps you. Would help me!

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