You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.14 and the total portfolio is equally as risky as the market. What must the beta be for the other stock in your portfolio

1.86

Explanation:

The computation of the beta for other stock in your portfolio is shown below:

Well if the portfolio is invested evenly in all three (one asset and two stocks) then a share of each will be 1 ÷ 3. And making the result of the share equal to the market, and adding all of them to their beta should be equal to 1.

Let us assume the beta for other stock be x

Now the equation is as follows

P = 1 = (1 ÷ 3) × (0) + (1 ÷ 3) × (1.14) + (1 ÷ 3) × (x)

1 = 0.38 + (1 ÷ 3) × (x)

1 - 0.38 =  (1 ÷ 3) × (x)

0.62  =  (1 ÷ 3) × (x)

So, x is

= 0.62 × 3

= 1.86

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