Question: Terry recently invested equal amounts in five stocks to form an investment portfolio, which has a beta equal to 1.2that is, P = 1.2.

Terry recently invested equal amounts in five stocks to form an investment portfolio, which has a beta equal to 1.2—that is, β_P = 1.2. Terry is considering selling the riskiest stock in the portfolio, which has a beta coefficient equal to 2.0, and replacing it with another stock. If Terry replaces the stock that has a equal to 2.0 with a stock that has a equal to 1.0, what will be the new beta of his investment portfolio? Assume that equal amounts are invested in each stock in the portfolio.

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