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14 October, 12:48

An individual has $20,000 invested in a stock with a beta of 0.6 and another $55,000 invested in a stock with a beta of 2.5. If these are the only two investments in her portfolio, what is her portfolio's beta? Do not round intermediate calculations. Round your answer to two decimal places.

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  1. 14 October, 16:31
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    1.99

    Explanation:

    The computation of portfolio's beta is shown below:-

    Total Portfolio value = Value of Stock 1 + Value of Stock 2

    = $20,000 + $55,000

    = $75,000

    Weight of Stock 1 = Value of Stock 1 : Total Portfolio Value

    = $20,000 : $75,000

    = 0.2667

    Weight of Stock 2 = Value of Stock 2 : Total Portfolio Value

    = $55,000 : $75,000

    = 0.7333

    Beta of Portfolio = Weight of Stock 1 * Beta of Stock 1 + Weight of Stock 2 * Beta of Stock 2

    = 0.6 * 0.2667 + 2.5 * 0.7333

    = 1.99

    So, for computing the portfolio's beta we simply applied the above formula.
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