CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
A portfolio consists of 50% in Stock X with a beta of 1.2, 30% in Stock Y with a beta of 0.8, and 20% in a risk-free asset. The portfolio's beta is closest to:
The portfolio beta is about 0.84. It is the weighted average of component betas: 50% × 1.2 plus 30% × 0.8 plus 20% × 0 for the risk-free asset. The risk-free holding has zero beta and so dilutes the portfolio's market sensitivity.
- A0.84Correct
- B1.00
- C1.34
Explanation
Portfolio beta is the weighted average of component betas: 0.5×1.2 + 0.3×0.8 + 0.2×0 = 0.60 + 0.24 + 0 = 0.84. The 1.00 option comes from treating the weights as if they ignored the risk-free asset's zero beta and averaging the two stock betas. The 1.34 option is not supported by the weights, since the portfolio beta must be below the highest stock beta.
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