Analyzing a Portfolio You have $200,000 to invest in a portfolio containing Stoc

Question

Analyzing a Portfolio

You have $200,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 11.85 percent. Stock X has an expected return of 10.39 percent and a beta of 1.26, and Stock Y has an expected return of 7.01 percent and a beta of .74.

1-How much money will you invest in stock X? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

2-What is the beta of your portfolio? (Do not round intermediate calculations and round your answer to 3 decimal places. (e.g., 32.161))

Explanation / Answer

You have $200,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 11.85 percent. Stock X has an expected return of 10.39 percent and a beta of 1.26, and Stock Y has an expected return of 7.01 percent and a beta of .74.

1-How much money will you invest in stock X? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Expected return of portfolio = Expected return of Stock X* Weight of Stock X + Expected return of Stock Y* Weight of Stock Y

11.85 = 10.39*Weight of Stock X + 7.01 * (1- Weight of Stock X)

11.85 = 10.39*Weight of Stock X + 7.01 - 7.01*Weight of Stock X

Weight of Stock X = (11.85- 7.01)/3.38

Weight of Stock X = 1.431953

Investment in Stock X = 200000*1.43195266

Investment in Stock X = 286,390.53

2-What is the beta of your portfolio? (Do not round intermediate calculations and round your answer to 3 decimal places. (e.g., 32.161))

Beta of your portfolio = Beta of Stock X* Weight of Stock X + Betaof Stock Y* Weight of Stock Y

Beta of your portfolio = 1.26*1.43195266 + 0.74 * - 0.43195266

Beta of your portfolio = 1.485

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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