You want to create a portfolio equally as risky as the market, and you have $500

Question

You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Information about the possible investments is given below I lot 80 1.15 1.40 Investment $120,000 Asset Stock A Stock B 150,000 Stock C Risk-free asset Requirement 1 How much will you invest in Stock C? (Do not round intermediate calculations. Round your answer to2 decimal places (e.g., 32.16).) Investment in Stock C S154642.868 Requirement 2 How much will you invest in the risk-free asset? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Investment in risk-free asset 226250

Explanation / Answer

Let investment in Stock C=$x

Hence investment in risk free assets=500,000-(120000+150000+x)

=230,000-x

Portfolio beta=Respective betas*Respective investment weights

1=(120,000/500,000*0.8)+(150,000/500,000*1.15)+(x/500,000*1.4)+(230,000-x)//500,000*0[Beta of risk free assets=0)

1=0.192+0.345+(x/500,000*1.4)

Hence x=investment in Stock C=(1-0.192-0.345)*500,000/1.4

=$165,357.14(Approx)

hence investment in risk free assets=(230,000-165357.14)=$64642.86(Approx)

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.