Please help me in Working with portfolio Beta This is tough stuff! Thanks:) 5. W
ID: 2787352 • Letter: P
Question
Please help me in Working with portfolio Beta
This is tough stuff! Thanks:)
5. Working with portfolio beta Aa Jerry's portfollo is Invested equally In five stocks (that is, each stock in the portfolio has a weight of 0.20) and has a required return of 9.4%. The risk-free rate is 5%, and the market risk premium is 496, what is the portfolio's beta? Assume that Jerry's portfolio is on the SML O 0.800 1.250 O 1.100 O 0.950 O 1.000 The last stock added to this portfolio was Lauren Clothing Co., which has a beta of 0.40. What was the portfolio's beta before Lauren's stock was added? (Hint: Remember that it was a four-stock portfolio before the last stock was added.) O 1.000 O 1.025 1.275 O 1.225 O 1.150Explanation / Answer
1)Required return =Rf+ [Beta*market risk premium]
9.4= 5+ [Beta *4]
9.4-5 = Beta *4
Beta = 4.4/4
= 1.1
correct option is "c"
2)
Beta of new portfolio =Beta of old portfolio +[Beta of new stock *weight ]
1.10 = [Beta of old portfolio*new weights /old weights] + [.40*.20]
1.10 - .08 =]BETA OF old portfolio*.80/1]
beta of old portfolio = 1.02/.80 = 1.275
correct option is "C"