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Portfolio X consists of 4 stocks which are A, B, C, and D. The information pertaining to the stocks, the portfolio and the market are given below:
Stock Investment Beta
A $25,000 0.8
B $25,000 1.2
C $25,000 Not available
D $25,000 Not available
Portfolio X $100,000 1
Expected return of the market = 10%
Risk-free rate = 4%
(a) Calculate the beta of Portfolio Y that is equally invested in stock A and stock B.
(b) Compute the beta of Portfolio Z that is equally invested in stock C and stock D.
(c) Suppose you sell all $25,000 invested in Stock A and use the proceeds to invest in Stock B. Calculate the resulting value of the beta of Portfolio X.
(d) Compute the change in the expected return of Portfolio X resulting from your actions in part (c).
(e) Discuss the likely circumstances where you would sell a stock with a lower beta and invest the proceeds in a stock with a higher beta, as in part (c).
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