Sarah is a portfolio manager at Use Fund. She thinks that the probability is 50% that GDP will expand 2.5% and 50% that it will contract 2.5%. She can choose out of 8 stocks with betas equal to 0.3, 1.8, 0.4, 1.6, 0.5, 1.5, 0.7 and 1.2. She plans to mix 4 out of the 8 stocks (equal weights) to build an aggressive (cyclical) portfolio; and mix 4 out of the 8 stocks (equal weights) to construct a defensive portfolio with equal weights of 25%. Based on this information, the betas of the aggressive and defensive portfolios will be __________ and _________ , respectively.
a.
1.525 and 0.475
b.
1.025 and 0.975
c.
1.85 and 0.35
d.
1.350 and 1.275
solution
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