You have $138,000 to invest in a portfolio containing Stock X and Stock Y. Your

Question

You have $138,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 17.4 percent. Stock X has an expected return of 15.6 percent and a beta of 1.40, and Stock Y has an expected return of 11.6 percent and a beta of 1.16. How much money will you invest in stock Y? (Do not round intermediate calculations. A negative amount should be indicated by a minus sign.) Investment in Stock Y What is the beta of your portfolio? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)

Explanation / Answer

Let investment in X=$x

Hence investment in Y=(138000-x)

Portfolio return=Respective returns*Respective weights

0.174=(0.156x/1380000)+(0.116(138000-x)/138000)

0.174*138000=0.156x+16008-0.116x

Hence x=(24012-16008)/(0.156-0.116)=$200100

Hence investment in Y=(138000-200100)=($62100)(Negative).

Beta of portfolio=Respective betas*Respective weights

=(1.4*200100/138000)+(1.16*-62100/138000)

=1.508

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