You own a portfolio which is 25 percent invested in U.S. Treasury bills, 30 perc

Question

You own a portfolio which is 25 percent invested in U.S. Treasury bills, 30 percent invested in Stock A with a beta of 0.80, 25 percent invested in stock B with a beta of 1.40, and the remainder is invested in stock C. Stock C is equally as risky as the market. The risk-free rate of return (Rf) is 2.50 percent and the expected return on the market (E(Rm)) is 15 percent. What is the portfolio beta? [Use the fact that the beta of the market portfolio is 1 and the beta of the risk-free asset, such as Treasury bills, is zero]

0.79

0.80

1.04

1.07

1.10

0.79

0.80

1.04

1.07

1.10

Explanation / Answer

Portfolio Beta is 0.79 Stock Weight Beta Weighted Beta Treasury Bills                                     0.25                        -                                       -   Stock A                                     0.30                   0.80                                0.24 Stock B                                     0.25                   1.40                                0.35 Stock C                                     0.20                   1.00                                0.20                                     1.00                                0.79

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