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

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

14.05 = Weight of Stock X*12.74 + (1-Weight of Stock X)*8.96

14.05 = 12.74Weight of Stock X + 8.96 - 8.96Weight of Stock X

Weight of Stock X = (14.05-8.96)/(12.74-8.96)

Weight of Stock X = 1.34656085

Weight of Stock Y = 1 - 1.34656085

Weight of Stock Y = -0.34656085

Investment in Stock Y = Weight of Stock Y*Total investment

Investment in Stock Y = -0.34656085*250000

Investment in Stock Y = - 86,640.21

Portfolio beta = Weight of Stock X* beta of StockX + Weight of Stock Y * beta of Stock Y

Portfolio beta =1.34656085*1.32 + (-0.34656085) *0.78

Portfolio beta = 1.507

Answer

Investment in Stock Y = - 86,640.21

Portfolio beta = 1.507

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