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? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Investment in Stock Y $

What is the beta of your portfolio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Portfolio beta

Explanation / Answer

Portfolio return is the weighted average of individual returns

Let 'x' be the weight in stock x.

14.05% = x*12.74% + (1-x)*8.96%

x = 1.3466

Investment in stock Y = 1-1.3466 = -0.3466 = -34.66%

b.

Beta of the portfolio is the weighted average of individual betas.

Portfolio beta = 1.3466*1.32 + (-0.3466)*0.78 = 1.51

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