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 14.05 percent. Stock X has an expected return of 12.74 percent and a beta of 1.32, and Stock Y has an expected return of 8.96 percent and a beta of .78.

How much money will you invest in stock Y? (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))

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

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 14.05 percent. Stock X has an expected return of 12.74 percent and a beta of 1.32, and Stock Y has an expected return of 8.96 percent and a beta of .78.

Explanation / Answer

Beta adjusted Return of X = 12.74 x 1.32 = 16.8168%

Beta adjusted Return of Y = 8.96 x .78 = 6.9888%

Required Rate of Return of portfolio = 14.05%

14.05 = (16.9888 x X) + [6.9888 x (1 - X)]

7.0612 = 9.828X

X = 0.7185

So, the Proportion of Stock X = 250,000 x 71.85% = $179,620

Investment in Y = 100 - 71.85 = 28.15% OR 250,000 x 28.15% = $70,380

Calculation of Beta of Portfolio:

Beta = (1.32 x 0.7185) + (0.78 x 0.2815)

Beta of Portfolio = 1.168

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