Asked by Holly

I am having the most trouble with this. Any help or direction would be greatly appreciated.

1) You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.7 and the total portfolio is equally as risky as the market, the beta for the other stock in your portfolio is_________?

Answers

Answered by Holly
Ms. Sue. You are a godsend. thank you so much. where does the 3 come from?
Answered by Ms. Sue
As you can see, I deleted my answer because I wasn't sure it was right.

Rethinking --

The average of three factors -- a risk-free asset and two stocks is 1. (The beta of the market is 1.)

Since we have 3 factors, I figured the beta of the other stock this way --

3 - 1.7 = 1.3

I hope a math teacher checks this.





Answered by Holly
you were correct the first time. thank you for your help.
Answered by MathMate
"By definition, the market itself has an underlying beta of 1.0..."
from
http://en.wikipedia.org/wiki/Beta_(finance)
and a zero-risk investment has a beta of zero.
http://www.investopedia.com/terms/z/zero-betaportfolio.asp

Thus, for the given problem,
3*Bmarket = Brisk-free + Bstock1 + Bstock2
3*1 = 0.0 + 1.7 + Bstock2
Beta for stock 2 = 3 - 0.0 - 1.7 = 1.3
This confirms Ms. Sue's previous answer.
Answered by Ms. Sue
Thank you, thank you, MathMate. I've been stewing about this all evening.

I missed the fact that a zero-investment has a beta of 0.
Answered by Ms. Sue
*zero-risk investment
Answered by MathMate
Thank you as well, I learned something tonight!
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