Beta: Beta is the covariance of a security with the market upon the variance of the market. Beta measures the change in percentage in the excess return of a particular security for 1% change in the excess return of a market portfolio or a benchmark portfolio. The beta of a market portfolio is always 1. However, the securities may have either higher or lower betas as compared to the beta of the market portfolio. The primary reason for this difference is the sensitivity of the individual industries to the economy. The beta of a portfolio is the weighted average beta of the overall stocks in a portfolio. The beta of a portfolio with three stocks, Stock E, Stock C, and Stock K can be calculated using the formula given below. Where, is the beta of a portfolio. is the weight of a stock. To determine: The beta of the portfolio.

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Chapter 12, Problem 27P

Summary Introduction

Beta:

Beta is the covariance of a security with the market upon the variance of the market. Beta measures the change in percentage in the excess return of a particular security for 1% change in the excess return of a market portfolio or a benchmark portfolio. The beta of a market portfolio is always 1. However, the securities may have either higher or lower betas as compared to the beta of the market portfolio. The primary reason for this difference is the sensitivity of the individual industries to the economy.

The beta of a portfolio is the weighted average beta of the overall stocks in a portfolio.

The beta of a portfolio with three stocks, Stock E, Stock C, and Stock K can be calculated using the formula given below.

Where,

is the beta of a portfolio.

is the weight of a stock.

To determine:

The beta of the portfolio.

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