I am having the most trouble with this. Any help or direction would be greatly appreciated.
1) You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.7 and the total portfolio is equally as risky as the market, the beta for the other stock in your portfolio is_________?
Ms. Sue. You are a godsend. thank you so much. where does the 3 come from?
As you can see, I deleted my answer because I wasn't sure it was right.
Rethinking --
The average of three factors -- a risk-free asset and two stocks is 1. (The beta of the market is 1.)
Since we have 3 factors, I figured the beta of the other stock this way --
3 - 1.7 = 1.3
I hope a math teacher checks this.
you were correct the first time. thank you for your help.
"By definition, the market itself has an underlying beta of 1.0..."
from
http://en.wikipedia.org/wiki/Beta_(finance)
and a zero-risk investment has a beta of zero.
http://www.investopedia.com/terms/z/zero-betaportfolio.asp
Thus, for the given problem,
3*Bmarket = Brisk-free + Bstock1 + Bstock2
3*1 = 0.0 + 1.7 + Bstock2
Beta for stock 2 = 3 - 0.0 - 1.7 = 1.3
This confirms Ms. Sue's previous answer.
Thank you, thank you, MathMate. I've been stewing about this all evening.
I missed the fact that a zero-investment has a beta of 0.