Portfolio Betas

Earlier, we saw that the riskiness of a portfolio has no simple relationship to the risks of the assets in the portfolio. A portfolio beta, however, can be calculated, just like a portfolio expected return. For example, looking again at Table 13.8, suppose you put half of your money in Exxon and half in America Online. What would the beta of this combination be? Because Exxon has a beta of .80 and America Online has a beta of 1.65, the portfolio's beta, (P, would be:

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

V. Risk and Return

13. Return, Risk, and the Security Market Line

© The McGraw-Hill Companies, 2002

CHAPTER 13 Return, Risk, and the Security Market Line pP = .50 X $Exxon + .50 X pAOi = .50 X .80 + .50 X 1.65 = 1.225

In general, if we had a large number of assets in a portfolio, we would multiply each asset's beta by its portfolio weight and then add the results up to get the portfolio's beta.

Portfolio Betas

Suppose we had the following investments:

Security

Amount Invested

Expected Return

Beta

Stock A

$1,000

8%

0 0

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