You currently own a portfolio valued at $56,000 that has a beta of 1.25. you have another $10,000 to invest and would like to invest it in a manner such that the portfolio beta decreases to 1.20. what does the beta of the new investment have to be

The beta of the new investment is= 0,9167

Explanation:

The beta of a portfolio is the weighted sum of the individual asset betas, According to the proportions of the investments in the portfolio. A beta of “1” indicates that its volatility is like the benchmarks. A number higher than “1” indicates more volatility, while lower numbers indicate more price stability. Diversification can help make your portfolios less volatile, allowing you to see steady growth without seeing wild swings in the value of your savings.

To calculate the beta of the portfolio you need to follow these steps:

1- Determine the market value of each stock. Calculate the total of your portfolio.

2- Determine how much you have of each stock as a percentage of the overall portfolio.

3- Multiply those percentage figures by the appropriate beta for each stock.

4- Add up the weighted beta figures.

In this exercise, we need to calculate the individual beta of an investment to achieve a determined beta of a portfolio.

1- Portfolio + Stock X  = 56000 + 10000 = 66000

2- Portfolio= 56000/66000= 0,85

    Stock X=  10000/66000= 0,15

3- Portfolio= 0,85*1,25

     Stock X= 0,15*X

4- Portfolio's beta= 1,20

1,20=0,85*1,25+0,15*X

X= -1,0625/0,15 + 1,20/0,15= 0,9166667

Portfolio's beta= 0,85*1,25 + 0,15*0,916667=1,20

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