You have $126,000 to invest in a portfolio containing Stock X and Stock Y. Your

Question

You have $126,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 18.0 percent. Stock X has an expected return of 14.4 percent and a beta of 1.30, and Stock Y has an expected return of 6.4 percent and a beta of 1.04. How much money will you invest in stock Y? (Negative amount should be indicated by a minus sign.) Investment in Stock Y $ What is the beta of your portfolio? (Round your answer to 3 decimal places. (e.g., 32.161)) Beta of the portfolio

Explanation / Answer

Answer: Desired return =126000*18%=$22680

X = investment in Stock X
$126,000 - X = Investment in Stock Y

so your total expected return is the expected return of Stock X plus the expected return of Stock Y

.144(X) + .064($126,000 - X) = $22680

0.144X+8064-0.064X=22680

0.08X=14616

X=182700

Y=126000-182700=-56700

Beta of portfolio=1.30*(182700/126000)+1.04*(-56700/126000)

=1.885-0.468

=1.417

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