What Should Be the Beta of a Replacement Stock If

question 49

Multiple Choice

What should be the beta of a replacement stock if an investor wishes to achieve a portfolio beta of 1.0 by replacing stock C in the following equally weighted portfolio: stock A = .9 beta; stock B = 1.1 beta; stock C = 1.35 beta?

• A) .93 beta
• B) 1.00 beta
• C) 1.08 beta
• D) 1.15 beta

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Definitions:

Record

Documentation or entry that captures the details of a transaction or event in accounting or other systems.

Stock Split

A corporate action that increases the number of a corporation's outstanding shares by dividing each share, which in turn diminishes its price.

Common Stock

A form of corporate equity ownership, a type of security that signifies ownership in a corporation and represents a claim on part of its profits.

Market Price

The current price at which a good or service can be purchased or sold in a competitive marketplace.