An entrepreneur has invested $2.2 million in project A with an NPV of $245,000 and an estimated beta of 0.59. She has invested another $3.7 million in project B with an NPV of $320,000 and an estimated beta of 1.23. The firm's estimated beta equals ________.
Click on the arrows to vote for the correct answer
A. B. C. D.Explanation
The market value of project A equals $2.2 million + $245,000 = $2.445 million.
The market value of project B equals $3.7 million + $320,000 = $4.02 million.
The firm can be considered a portfolio of 2 projects. The beta of a portfolio equals the weighted average of the betas of the individual components. The weight of a component equals the fraction of the market value it comprises. Therefore, the firm's market value equals 2.445 + 4.02 = $6.465 million and its beta equals
2.445/6.465*0.59 + 4.02/6.465*1.23 = 0.99.