A Portfolio of Three Stocks with Total Market Value of $1,000,000

question 115

Essay

A portfolio of three stocks with total market value of $1,000,000 currently has a beta of 1.4. In light of an expected market downturn, you wish to reduce the portfolio beta to no more than 1.0. Two stocks are likely candidates for sale, one with a beta of 1.8 and a market value of $200,000 and the other with a beta of 1.5 and a market value of $250,000. Assuming that you could find one appropriate stock to replace these two, what should be its beta? (Show your work)

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Definitions:

Significant Overhead Variances

Large differences between the budgeted overhead costs and the actual overhead costs incurred, indicating inefficiencies or inaccuracies in budgeting or operations.

Flexible Overhead Budget

A budget that adjusts overhead costs based on changes in activity levels or other factors, allowing for more accurate cost management.

Standard Input Measure

A benchmark for the amount of resources (materials, labor, and overhead) expected to be consumed in producing goods or services.

Direct Labour Hours

The total hours worked by employees directly involved in the production process of goods or delivery of services.