Calculate the Beta of a Portfolio with Investment in Stock A and Stock B
What is the beta of a portfolio where 60% of the funds are invested in Stock A and 40% in Stock B?
Calculate the beta of the portfolio with 60% investment in Stock A and 40% investment in Stock B is 1.11. The beta of a portfolio is the weighted average of the betas of the individual securities in the portfolio. To calculate the beta of a portfolio, we need to know the betas of the individual securities and the weight of each security in the portfolio. Given that the beta of Stock A is 1.35 and the beta of Stock B is 0.75, we can use the following formula to calculate the beta of the portfolio: Beta of Portfolio = (Weight of Stock A x Beta of Stock A) + (Weight of Stock B x Beta of Stock B). Where, Weight of Stock A = 60%, Weight of Stock B = 40%, Beta of Stock A = 1.35, Beta of Stock B = 0.75. Substituting these values in the formula, we get: Beta of Portfolio = (0.60 x 1.35) + (0.40 x 0.75) = 0.81 + 0.30 = 1.11.
Calculation of Beta for Portfolio
Given that:
Weight of Stock A = 60% = 0.60
Weight of Stock B = 40% = 0.40
Beta of Stock A = 1.35
Beta of Stock B = 0.75
Substitute the values:
Beta of Portfolio = (0.60 x 1.35) + (0.40 x 0.75)
Beta of Portfolio = 0.81 + 0.30
Beta of Portfolio = 1.11
Therefore, the beta of the portfolio with 60% invested in Stock A and 40% invested in Stock B is 1.11. This means that the portfolio's beta is 1.11, combining the risk of both Stock A and Stock B based on their respective weights in the portfolio.