The solution does : Estimated ungeared beta, with investment = (1.6 × 60/80) + (1.1 × 20/80) = 1.475 Kind of a weighted average of the betas if you will. Where is such a formula even mentioned in the notes or core reading, or the syllabus? I didnt know you can even treat betas in this way, since it is a ratio of variances???
Beta measures how much a stock price changes when an index or any other benchmark changes. Assuming I buy a stock with Beta of 1.6 for $60 and another with a beta of 1.1 for $20 and if the index changes by a 100%, the value of my portfolio of stocks will change by 147.5%. This logic can also be applied to a porfolio of business. Don't you think?
