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_________?
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.
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.
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.
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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