Response to the following problem:
Jeanne Lewis is attempting to evaluate two possible portfolios consisting of the same five assets but held in different proportions. She is particularly interested in using beta to compare the risk of the portfolios and, in this regard, has gathered the following data:
|
Asset
|
Asset Beta
|
Portfolio Weights (%)
|
|
Portfolio A
|
Portfolio B
|
|
1
|
1.30
|
10
|
30
|
|
2
|
0.70
|
30
|
10
|
|
3
|
1.25
|
10
|
20
|
|
4
|
1.10
|
10
|
20
|
|
3
|
0.90
|
40
|
20
|
Total
|
|
100 |
100 |
a. Calculate the betas for portfolios A and B.
b. Compare the risk of each portfolio to the market as well as to each other. Which portfolio is more risky?