You want to create a portfolio equally as risky as the market, and you have $1,0

ID: 2710213 • Letter: Y

Question

You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fill in the rest of the following table: (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations.)

Need help solving the investment value of Stock C and Risk free asset?

Explanation / Answer

Since, the portfolio has to be as risky as the market, therefore, the beta of the entire portfolio should be 1. We can derive the investment in stock C and risk free asset with the use of following formula:

Beta of the Portfolio = Investment in Stock A/Total Investment*Beta of Stock A + Investment in Stock B/Total Investment*Beta of Stock B + Investment in Stock C/Total Investment*Beta of Stock C + Investment in Risk Free Asset/Total Investment*Beta of Stock Risk Free Asset

____________

Let the investment in Stock C be X, the investment in Risk Free Asset would be (1,000,000 - 120,000 - ,220,000 - X) or (660,000 - X)

Using the values provided in the question in the above formula, we get,

1 = 120,000/1,000,000*1 + 220,000/1,000,000*1.20 + X/1,000,000*1.40 + (660,000 - X)/1,000,000*0

Rearranging values, we get,

1*1,000,000 = 120,000 + 264,000 + 1.4X + 0

X = (1,000,000 - 120,000 - 264,000)/1.4 = 440,000 (Investment in Stock C)

Investment in Risk Free Asset = 660,000 - 440,000 = $220,000

___________

Tabular Representation:

Asset Investment Beta Stock A $ 120,000 1 Stock B $ 220,000 1.2 Stock C $440,000 1.4 Risk-Free Asset $220,000 0

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You want to create a portfolio equally as risky as the market, and you have $1,0

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You want to create a portfolio equally as risky as the market, and you have $1,0

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