Question
Portfolio X consists of 4 stocks which are A, B, C, and D. The information pertaining to the stocks, the portfolio and the market are
Portfolio X consists of 4 stocks which are A, B, C, and D. The information pertaining to the stocks, the portfolio and the market are given below:
Stock | Investment | Beta |
A | $25,000 | 0.8 |
B | $25,000 | 1.2 |
C | $25,000 | Not Available |
D | $25,000 | Not Available |
Portfolio X | $100,000 | 1 |
Expected return of the market = 10% Risk-free rate = 4%
(a) Calculate the beta of Portfolio Y that is equally invested in stock A and stock B.
b) Compute the beta of Portfolio Z that is equally invested in stock C and stock D.
(c) Suppose you sell all $25,000 invested in Stock A and use the proceeds to invest in Stock B. Calculate the resulting value of the beta of Portfolio X.
(d) Compute the change in the expected return of Portfolio X resulting from your actions in part (c).
(e) Discuss the likely circumstances where you would sell a stock with a lower beta and invest the proceeds in a stock with a higher beta, as in part (c).
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