Determine the beta of a portfolio consisting of Priceline.com Inc. (ticker: PCLN), Johnson & Johnson (U:JNJ), Home Depot (U:HD), and Goodyear Tire & Rubber Company (GT). You invest equal amounts of capital in each stock. How does the beta of this portfolio compare with the individual betas? Explain.
Instead of investing equal amounts of capital in each stock, you decide to short shares worth $1,000 in each of the two least risky stocks (of the above four stocks) and invest $2,000 each in the two most risky stocks. How do you think the beta of this new portfolio will compare with the individual stock betas?
Calculate the beta of this new portfolio and check if it matches your expectations. Consider another alternate portfolio.
Now you short shares worth $1,000 in each of the two most risky stocks and invest $2,000 each in the two least risky stocks. How do you think the beta of this new portfolio will compare with the individual stock betas? Calculate the beta of this new portfolio and check if it matches your expectations. Do you think this portfolio will ever be profitable? If so, when?