question archive Spielberg builds a portfolio by investing in two stocks only: Google (GOOG) and Huawei (SHE)
Spielberg builds a portfolio by investing in two stocks only: Google (GOOG) and Huawei (SHE)
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Spielberg builds a portfolio by investing in two stocks only: Google (GOOG) and Huawei (SHE). According to the CAPM, the expected risk premium (i.e., the expected return minus the risk-free rate) of GOOG is 9.77% and the expected risk premium of SHE is 5.12%. The beta of GOOG is equal to 1.05. If Spielberg puts 69% of his money in GOOG stock and 31% in SHE stock, what is the approximate beta of his portfolio?
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The approximate beta of portfolio is computed as shown below:
= Beta of GOOG x weight of GOOG + Beta of NOK x weight of NOK
Market risk premium is computed as follows:
= Expected risk premium of GOOG / Beta of GOOG
= 9.77% / 1.05
= 0.09304761904
Beta of NOK is computed as follows:
= Expected risk premium of NOK / Market risk premium
= 5.12% / 0.09304761904
= 0.550255885
So, the beta will be as follows:
= (1.05 x 0.69) + (0.550255885 x 0.31)
= 0.7245? + 0.17057932435
= 0.89507932435?
= 0.895 Approximately
Step-by-step explanation
The approximate beta of his portfolio = 0.895
