Financial Risk Manager Part 1
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Huma Ahmed is a junior portfolio analyst who has recently switched from the fixed income portfolio management unit to his firm's equity portfolio management unit. On her first day, she was asked by her senior portfolio analyst to compute the portfolio's beta that contains 5 assets. Using the data provided in the table, determine the beta of the portfolio.
| Asset | Return | Weight | Beta |
|---|---|---|---|
| 1 | 1.3% | 0.10 | 0.35 |
| 2 | 10% | 0.25 | 0.20 |
| 3 | 6% | 0.25 | 0.15 |
| 4 | 9% | 0.30 | 0.60 |
| 5 | 16% | 0.10 | 0.40 |
Other
Community
TTanishq
A
1.7
B
0.34
C
0.09
D
-1.1
Explanation:
The beta (β) of the portfolio is calculated as the weighted average of individual asset betas:
βₚ = W₁β₁ + W₂β₂ + W₃β₃ + W₄β₄ + W₅β₅
βₚ = 0.10 × 0.35 + 0.25 × 0.20 + 0.25 × 0.15 + 0.30 × 0.60 + 0.10 × 0.40
βₚ = 0.035 + 0.05 + 0.0375 + 0.18 + 0.04 = 0.3425
The portfolio beta is approximately 0.34, which corresponds to option B.
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