You want to create a portfolio equally as risky as the market, and you have $1,3

Question

You want to create a portfolio equally as risky as the market, and you have $1,300,000 to invest. Given this information, fill in the rest of the following table: (Do not round intermediate calculations. Round your answers to the nearest whole number, e.g., 32.)

You want to create a portfolio equally as risky as the market, and you have $1,300,000 to invest. Given this information, fill in the rest of the following table: (Do not round intermediate calculations. Round your answers to the nearest whole number, e.g., 32.)

Explanation / Answer

We know the total portfolio value and the investment of two stocks in the portfolio, so we can find the weight of these two stocks. The weights of Stock A and Stock B are wA = 156000 / 1300000 wA = 0.12 wB = 247000/1300000 wB = 0.19 Since the portfolio is as risky as the market, the of the portfolio must be equal to one. We also know the of the risk-free asset is zero. We can use the equation for the of a portfolio to find the weight of the third stock. Doing so, we find P = 1.0 = wA (1.30) + wB (1.60) + wC (1.60) + wRf (0) 1.0 or, 1 = 0.12(1.30) + 0.19(1.60) + wC (1.60) or, 1 = 0.12(1.30) + 0.19(1.60) + wC (1.60) or, 1 = 0.156 + 0.304 + 1.6wC or, 1.6wC = 0.54 or, wC = 0.3375 Amount of Investment in C = 0.3375 * $1,300,000 = $438750 We also know the total portfolio weight must be one, so the weight of the risk-free asset must be one minus the asset weight we know, or wP = 1.0 = wA + wB + wC + wRf or, 1 = 0.12 + 0.19 + 0.3375 + wRf or, wRf = 1 - 0.6475 or, wRf = 0.3525 Amount of Investment in Rf = 0.3525 * $1,300,000 = $458250

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