Asset A has beta 1.2, asset B has beta 0.6, and portfolio weights are 0.5 each. What is the portfolio beta?

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Study for the Finance and Investment Challenge Test. Approaches include flashcards and multiple-choice questions with hints and explanations. Ready yourself to ace the exam!

Multiple Choice

Asset A has beta 1.2, asset B has beta 0.6, and portfolio weights are 0.5 each. What is the portfolio beta?

Explanation:
Beta measures how responsive a portfolio’s returns are to market movements. To get the portfolio beta, you take the weighted average of the individual betas: beta_p = wA * betaA + wB * betaB. With equal weights (0.5 and 0.5), beta_p = 0.5*1.2 + 0.5*0.6 = 0.6 + 0.3 = 0.9. This means the portfolio tends to move with the market but about 90% as much, i.e., it’s slightly less volatile than the market. The result sits between the two asset betas, reflecting the mix of a higher-beta asset and a lower-beta asset.

Beta measures how responsive a portfolio’s returns are to market movements. To get the portfolio beta, you take the weighted average of the individual betas: beta_p = wA * betaA + wB * betaB. With equal weights (0.5 and 0.5), beta_p = 0.51.2 + 0.50.6 = 0.6 + 0.3 = 0.9. This means the portfolio tends to move with the market but about 90% as much, i.e., it’s slightly less volatile than the market. The result sits between the two asset betas, reflecting the mix of a higher-beta asset and a lower-beta asset.

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