12-2) An investor currently holds the following portfolio: Amount I nvested 5.0

Question

12-2) An investor currently holds the following portfolio:
Amount I nvested
5.0 shares of Stock A $10,000 Beta = 1.8
10.0 shares of Stock B $30,000 Beta = 1.5
20.0 shares of Stock C $20,000 Beta = 1.2
The investor is worried that the beta of his portfolio is too high, so he wants to sell some stock A and add stock D, which has a beta of 0.70, to his portfolio. If the investor wants his portfolio to have a beta of 1.30, how much stock A must he replace with stock D?
a. $8,182
b. $7,230
c. $6,875
d. $9,309

Explanation / Answer

Suppose X is the stock replaced so we have to find X. The equation is then, (10,000 - X) * 1.8 + (30,000 * 1.5 ) + 20,000*1.2 + X * .7 = 60,000 * 1.3 Solving ,The value of X comes out to be A) $8,812 So answer is A.

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