Your retirement fund consists of a $5,000 investment in each of 15 different common stocks. The portfolio's beta is 1.20. Suppose you sell one of the stocks with a beta of 0.8 for $5,000 and use the proceeds to buy another stock whose beta is 1.6. Calculate your portfolio's new beta.

portfolio's new beta is 1.25

Explanation:

Total number of stocks available in the portfolio = 15

Total portfolio = 1.20

Beta of stock to be sold = 0.8

Beta of stock to be purchased = 1.6

Weight of one stock (replacing stock) = 1/15

New portfolio beta = Total portfolio - (Weight * Beta of selling stock) + (Weight * Beta of purchasing stock)

New portfolio beta = 1.20 - [ (1/15) * 0.8] + [ (1/15) * 1.6]

= 1.20 - 0.05333 + 0.10667

= 1.25334

≈ 1.25