Part 1. Tom O\'Brien has a 2-stock portfolio with a total value of $100,000. $35
ID: 2805605 • Letter: P
Question
Part 1. Tom O'Brien has a 2-stock portfolio with a total value of $100,000. $35,000 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is his portfolio's beta?
part 2
You hold a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each. The portfolio's beta is 1.12. You plan to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.25. What will the portfolio's new beta be?
Returns for the Dayton Company over the last 3 years are shown below. What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.)
14.47%
15.54%
17.15%
20.36%
17.86%
Year Return 2011 21.00% 2010 -12.50% 2009 15.00%Explanation / Answer
Answer to Part 1.
Total Value of Portfolio = $100,000
Investment in Stock A = $35,000
Investment in Stock B = $65,000
Weight of Stock A = 35,000 / 100,000 = 0.35
Weight of Stock B = 65,000 / 100,000 = 0.65
Portfolio Beta = (Weight of Stock A * Beta of Stock A) + (Weight of Stock B * Beta of Stock B)
Portfolio Beta = (0.35 * 0.75) + (0.65 * 1.42)
Portfolio Beta = 0.2625 + 0.923
Portfolio Beta = 1.1855
Answer to Part 2.
Portfolio Value = $100,000
No. of Stock in Portfolio = 20 Stock
Weight of each stock = 1/ 20 = 0.05
Portfolio Beta = 1.12
Portfolio’s New Beta = 1.12 – (0.05 * 0.90) + (0.05 * 1.25)
Portfolio’s New Beta = 1.12 – 0.045 + 0.0625
Portfolio’s New Beta = 1.1375