You have $134,000 to invest in a portfolio containing Stock X and Stock Y. Your

Question

You have $134,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 16.4 percent. Stock X has an expected return of 15.2 percent and a beta of 1.36, and Stock Y has an expected return of 12.2 percent and a beta of 1.12.

How much money will you invest in stock Y?

You have $134,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 16.4 percent. Stock X has an expected return of 15.2 percent and a beta of 1.36, and Stock Y has an expected return of 12.2 percent and a beta of 1.12.

Explanation / Answer

Let the invetment in X in A So, (15.2*1.36A+12.2*1.12*(1-A)=16.4 or (15.2*1.36-12.2*1.12)A=16.4-12.2*1.12 or 7.008A=2.736 or A=2.736/7.008=0.39 or 39% Investment in Y=100-39=61%=0.61*134000=81740 Beta of portfolio=0.39*1.36+0.61*1.12=1.21

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