The Beta eta of a firm\'s stock indicates the degree to which changes in a firm\

Question

The Beta eta of a firm's stock indicates the degree to which changes in a firm's stock price track, or follow, changes in the stock market overall. A Beta eta of 1.0 indicates that, on average, a firm's stock price rises or falls the same percentage as the market overall (for example, if the market overall increases 1%, the firm's stock price increases 1%, on average). A beta eta of 2.0 indicates that, on average, a firm's stock price rises or falls at twice the percentage of the market overall (for example, if the market overall decreases 1%, the firm's stock price decreases 2%, on average). Portfolios, or groups, of stocks also have Beta etas, which can be interpreted as the market-related volatility, or market risk, of a portfolio, or group, of stocks. The Beta eta of a stock portfolio is the weighted mean of the beta etas of the individual stocks, where the weights are based on the current market values of the stocks (current market value = current stock price times number of shares in the portfolio). Consider the following portfolio of three Seattle-area stocks (Price and Beta eta values from Yahoo! Finance): Calculate the Beta eta of the portfolio on 7 September 2017.

Explanation / Answer

Beta for the portfolio is the weighted average of the individual betas for the stocks

Hence beta for the portfolio is 1.349

Company Price No of shares Value of shares Weight of share Beta Weight*Beta Microsoft 74.34 500 37170 37170/19900=0.187 1.44 0.269 Starbucks 53.47 1000 53470 0.269 0.64 0.172 Tableau 72.24 1500 108360 0.544 1.67 0.908 Total 199000 1.349

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