You have $250,000 to invest in a portfolio containing Stock X and Stock Y . Your

Question

You have $250,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 14.52 percent. Stock X has an expected return of 12.48 percent and a beta of 1.32, and Stock Y has an expected return of 8.45 percent and a beta of .70.

How much money will you invest in stock Y?

What is the beta of your portfolio?

You have $250,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 14.52 percent. Stock X has an expected return of 12.48 percent and a beta of 1.32, and Stock Y has an expected return of 8.45 percent and a beta of .70.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Let the amount invested in Stock X be X

Weight of Stock X = X/250000

The amount invested in Stock Y = 250000 - X

Weight of Stock Y = (250000 - X)/250000

Portfolio Expected Return = Stock X Expected Return*Weight of Stock X + Stock Y Expected Return*Weight of Stock Y

14.52 = 12.48*X/250000 + 8.45*(250000 - X)/250000

14.52 = 12.48X/250000 + (2112500 - 8.45 X)/250000

14.52*250000 = 12.48X + 2112500 - 8.45X

3630000 = 4.03X + 2112500

Amount Invested in Stock X = (3630000 - 2112500)/4.03 = 376550.87 or 376551

Amount Invested in Stock Y = 250000 - 376551 = -126551

Answer for Part A is 376550.87 or 376551

Part B:

Portfolio Beta = Weight of Stock A*Beta of Stock A + Weight of Stock B*Beta of Stock B = 376551/250000*1.32 -126551/250000*.70 = 1.63

Answer for Part B is 1.63

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.