# Question

You are considering the construction of a portfolio comprised of equal investments in each of four different stocks. The betas for each stock on next page:

Security Beta

A ......... 2.5

B ......... 1.0

C ......... 0.5

D ......... –1.5

a. What is the portfolio beta for your proposed investment portfolio?

b. How would a 25 percent increase in the expected return on the market impact the expected return of your portfolio?

c. How would a 25 percent decrease in the expected return on the market impact the expected return on each asset?

d. If you are interested in decreasing the beta of your portfolio by changing your portfolio allocation to two stocks, which stock would you decrease and which would you increase? Why?

Security Beta

A ......... 2.5

B ......... 1.0

C ......... 0.5

D ......... –1.5

a. What is the portfolio beta for your proposed investment portfolio?

b. How would a 25 percent increase in the expected return on the market impact the expected return of your portfolio?

c. How would a 25 percent decrease in the expected return on the market impact the expected return on each asset?

d. If you are interested in decreasing the beta of your portfolio by changing your portfolio allocation to two stocks, which stock would you decrease and which would you increase? Why?

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