Suppose you are managing a portfolio, consists of 20 stocks. At this time, the b
ID: 2752849 • Letter: S
Question
Suppose you are managing a portfolio, consists of 20 stocks. At this time, the beta of your portfolio is 1.65. You decided to sell five stock from your portfolio; the total beta of those five stock was 2.00. You are also thinking to purchase 10 additional stocks, with a combined beta of 1.05, to replace the stocks you are selling. All stocks are of equal weights in your portfolio, both before and after these transactions. (Hint: each stock weighs 5% before and 4% after the transactions)
After selling the stocks from the portfolio, what would be the total beta of the remaining stocks in your portfolio?
What would be the beta of your portfolio if you purchase the new stocks and put it in your portfolio?
Explanation / Answer
After selling the stocks from the portfolio, the total beta of the remaining stocks in portfolio
= portfolio beta - beta of stocks sold
= 1.65 - (2*5%)
= 1.55
The beta of the portfolio if new stocks are purchased and are put in the portfolio
= Beta after selling the stocks + beta of new stocks purchased
= 1.55 + (1.05 *4%)
= 1.59
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