You own a stock portfolio invested 25 percent in Stock Q, 25 percent in Stock R,

Question

You own a stock portfolio invested 25 percent in Stock Q, 25 percent in Stock R, 15 percent in Stock S, and 35 percent in Stock T. The betas for these four stocks are 0.98, 0.64, 1.2, and 0.84, respectively. What is the portfolio beta?

NOTE: Beta for a portfolio is a portfolio weighted average of the betas on the portfolio's assets. This differs from the standard deviation, which can't be calculated as a portfolio weighted average. Why? Beta only represents risk that can't be diversified, but standard deviation includes diversifiable and non-diversifiable risk. Since the diversifaible risk starts to disappear as assets are added to a portfolio, the standard deviation of the portfolio tends to be smaller than the average standard deviation of the assets in the portfolio.

0.84

0.88

0.92

0.86

0.9

Explanation / Answer

Stock % in Portfolio Beta wighted beta Q                           25                  0.98                       0.25 R                           25                  0.64                       0.16 S                           15                  1.20                       0.18 T                           35                  0.84                       0.29                       0.88 Portfolio Beta is 0.88

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