CMA Final · Strategic Financial Management · Portfolio Theory and Practice
A portfolio has 60% invested in a stock with beta 1.2 and 40% in a stock with beta 0.8. What is the portfolio beta?
Portfolio beta is the weighted average of the component betas. Multiplying 60% by 1.2 gives 0.72, and 40% by 0.8 gives 0.32. The sum is 1.04. An unweighted average of 1.00 ignores the different proportions invested.
- A1.00
- B1.04Correct
- C0.96
- D1.10
Explanation
Portfolio beta is the weighted average of betas: 0.6 x 1.2 + 0.4 x 0.8 = 0.72 + 0.32 = 1.04. The 1.00 option comes from a simple unweighted average, and 0.96 reverses the weights.
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