You hold a diversified portfolio consisting of many different common stocks with a total market value of $100,000. The portfolio beta is equal to 1.15. You have decided to sell one of your stocks, a lead mining stock whose beta is equal to 0.7, for $10,000 net and to use the proceeds to buy $10,000 of stock in a steel company whose beta is equal to 2.3. What will be the new beta of the portfolio? (Round to two digit decimal places, e. g., 1.15)

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Business

Skylar Kirk

21 November, 17:20

You hold a diversified portfolio consisting of many different common stocks with a total market value of $100,000. The portfolio beta is equal to 1.15. You have decided to sell one of your stocks, a lead mining stock whose beta is equal to 0.7, for $10,000 net and to use the proceeds to buy $10,000 of stock in a steel company whose beta is equal to 2.3. What will be the new beta of the portfolio? (Round to two digit decimal places, e. g., 1.15)

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Yair Fowler · Answer 1

The new beta of the portfolio is 1.31

Explanation:

The computation of the new beta portfolio is equal to

= Portfolio beta - (selling Beta * net value : total market value) + (purchase beta * net value : total market value)

= 1.15 - (0.7 * $10,000 : $100,000) + (2.3 * $10,000 : $100,000)

= 1.15 - 0.07 + 0.23

= 1.31

For computing the accurate value we add the purchase beta and deduct the selling beta from the portfolio beta.