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(Security market line) You are considering the construction of a portfolio comprised of equal investments in each of four different stocks. The betas for each stock are found below:

Asset	Beta
A	2.00
B	1.10
C	0.45
D	1.30

a.What is the portfolio beta for your proposed investment portfolio?

b.How would a 25 percent increase in the expected return on the market impact the expected return of your portfolio?

c.How would a 25 percent decrease in the expected return on the market impact the expected return on each asset?

d.If you are interested in decreasing the beta of your portfolio by changing your portfolio allocation in two stocks, which stock would you decrease and which would you increase? Why?

Question content area bottom

Part 1

a. The portfolio beta for your proposed investment portfolio is enter your response here. (Round to three decimal places.)

Part 2

b.A 25% increase in the expected return on the market will cause the expected return of your portfolio to (decrease/increase?) by enter your response here%. (Select from the drop-down menu and round the answer to two decimal places.)

Part 3

c. A 25% decrease in the expected return on the market will have the following impact on the expected return on each asset:

Asset A would (increase/decrease?) by enter your response here%. (Select from the drop-down menu and round the answer to two decimal places.)

Part 4

Asset B would (decrease/increase?) by enter your response here%. (Select from the drop-down menu and round the answer to two decimal places.)

Part 5

Asset C would (increase or decrease?) by enter your response here%. (Select from the drop-down menu and round the answer to two decimal places.)

Part 6

Asset D would (decrease or increase?) by enter your response here%. (Select from the drop-down menu and round the answer to two decimal places.)

Part 7

d. If you are interested in decreasing the beta of your portfolio by changing your portfolio allocation in two stocks, which stock would you decrease and which would you increase? Why?(Select the best choice below.)

A. You should increase asset D and decrease asset A because asset D's beta is negative and asset A has the highest beta.

B. You should increase asset B and decrease asset C because asset B' beta is close to 1 and asset C's beta is the closest to zero.

C. You should increase asset A and decrease asset D because asset D's beta is negative and asset A has the highest beta.

D. You should decrease asset D and increase asset A because asset D's beta is negative and asset A has the highest beta.

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