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18 February, 17:44

Your portfolio has a beta of 1.18. The portfolio consists of 20% U. S. Treasury bills, 30% in stock A, and 50% in stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of stock B

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  1. 18 February, 18:15
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    Beta of Stock B = 1.76

    Explanation:

    The portfolio is made up of three components.

    The Tbills have are risk free thus have 0 beta.

    The stock A has risk equivalent to market which means the beta for Stock A is 1 as the market always has a beta of 1.

    Let x be the beta of Stock B.

    Portfolio beta = 1.18

    The portfolio beta is calculated by taking the weighted average of individual betas of securities in the portfolio.

    So,

    1.18 = (0.2 * 0) + (0.3 * 1) + (0.5 * x)

    1.18 = 0 + 0.3 + 0.5x

    1.18 - 0.3 = 0.5x

    0.88 / 0.5 = x

    x = 1.76
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