• Submitted By: ibensona
  • Date Submitted: 04/22/2013 11:48 PM
  • Category: Business
  • Words: 2967
  • Page: 12
  • Views: 134


It would be prudent to first describe the various elements of the equation ;

Asset Portfolio : A group of investments such as stocks, bonds and cash equivalents , set of open positions held by an investor that are selected on the basis of an investor's short-term or long-term investment goals and are expected to give the highest possible return at the lowest possible risk .Modern portfolio theory suggests, you can reduce your investment risk by creating a diversified portfolio that includes different asset classes and individual securities chosen from different segments, or subclasses, of those asset classes. That diversification is designed to take advantage of the potential for strong returns from at least some of the portfolio's investments in any economic climate by reducing the inherent or “systemic” risk of the market.

Beta: Used in the context of general equities. The beta of the asset is the measure of an assets risk in relation to the market (eg. S&P500) or to an alternative benchmark .Asset Beta is a measurement of how the stock price of a company reacts to a change in the market. A beta figure greater than 1 means that the stock price of the company changes more than the rest of the market. A beta below 1 means that the stock price is stable and does not respond wildly to changes in the market. A beta of less than zero means that the stock price moves in the opposite direction to the market, taking leveraging effects into account.

Taking the above into consideration the beta of the assets of a firm equals a weighted average of the betas for the individual assets

For example a portfolio consists of three stocks with betas 0.7, 0.8, and 0.5. These stocks are held in following proportions:
A: 30%
B: 45%
C: 25%

Beta of portfolio = 0.7*0.30 + 0.8*0.45 + 0.5*0.25
= 0.21+0.36+0.125
= 0.695

Beta of asset portfolio reflects the risk of the firm to the risk of its financing portfolio, i.e. the risk of equity and debt only...

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