You would like to create a portfolio that is equally invested in a risk-free asset and two stocks. The one stock has a beta of .80. What does the beta of the second stock have to be if you want the portfolio risk to equal that of the overall market?

Answer 1

A risk-free asset has a beta of 0. The average market beta is 1.0

0.8 + x = 3.0
x = 3 - 0.8
x = 2.2