Question

Your retirement fund consists of a $7,500 investment in each of 20 different common stocks. The portfolio's beta is 0.65. Suppose you sell one of the stocks with a beta of 1.0 for $7,500 and use the proceeds to buy another stock whose beta is 2.25. Calculate your portfolio's new beta. Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

0.7125

Step-by-step explanation:

Calculation to determine your portfolio's new beta.

First step is to calculate the Increase in beta as a result of net sales

Increase in beta as a result of net sales=2.25-1

Increase in beta as a result of net sales=1.25

Hence:

increase/stock=1.25/20=0.0625

Now let calculate the new beta

New beta=0.65+0.0625

New beta=0.7125

Therefore your portfolio's new beta will be 0.7125