1. Suppose you have a diversified portfolio consisting of $10,000 investment in each of 10 different stocks. The portfolios beta is 1.12. You are considering selling $10,000 worth of one stock with a beta of 1.0 and using the proceeds to buy another stock with a beta of 1.14. What is the new beta of portfolio after these transactions?

is the answer 1.26

(The simplified expression calculates the new beta by subtracting the initial investment from the sum of ending values and dividing by the initial investment. In this case, the new beta is 1.26, indicating a change in the investment's risk profile.)

or

1.34 Since the value of each stock is 10,000, the portfolio beta is the average beta of all 10 stocks

Portfolio Beta = 1.12

Total Beta = 1.12*10 = 11.2

Now, a stock of beta 1.0 is replaced by beta 1.14

New total beta = 11.2 - 1 + 1.14

= 11.34

Portfolio beta = 11.34/10 = 1.134

Answer = 1.134