Assume that you own a well-diversified portfolio of securities. The portfolio consists of equal investments into the stocks of 20 companies. The market value of each investment is $7,500. The portfolio beta is 1.10.

You have decided to sell a stock with the beta of 0.75 and buy the shares of a company with beta of 1.80.

a) Explain shortly, what could be the possible reason behind this transaction? (1.5 point)

b) Calculate the new portfolio beta (3.5 points)