You want to create a portfolio equally as risky as the market, and you have $500
ID: 2625741 • Letter: Y
Question
You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Information about the possible investments is given below:
How much will you invest in Stock C? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
How much will you invest in the risk-free asset? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Explanation / Answer
You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Information about the possible investments is given below:
portfolio equally as risky as the market, that means Portfolio Beta = 1
Let Weight of Stock C be X
Than Weight of Risk-free asset = (1-142000/500000 - 138000/500000 -x) = (0.44-x)
Portfolio Beta = Weight of Stock A * Beta of stock A + Weight of Stock B * Beta of stock B + Weight of Stock C * Beta of stock C + Weight of Risk-free asset * Beta of Risk-free asset
1 = 142000/500000 * 0.87 + 138000/500000*1.32 + x*1.47 + (0.44 - x) *0
1.47x = 1- 0.6114
x = 0.3886/1.47
Investment in Stock X = 0.3886/1.47 * 500000
Investment in Stock X = $ 132,176.87
Investment in Risk Free Asset = 500000 -142000-138000 - 132176.87
Investment in Risk Free Asset = $ 87,823.13
Requirement 1:
How much will you invest in Stock C? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Investment in Stock X = $ 132,176.87
How much will you invest in the risk-free asset? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Investment in Risk Free Asset = $ 87,823.13
Asset Investment Beta Stock A $ 142,000 .87 Stock B $ 138,000 1.32 Stock C 1.47 Risk-free assetRelated Questions
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