You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your

Question

You have $100,000 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 percent. Stock X has an expected return of 14.8 percent and a beta of 1.35, and Stock Y has an expected return of 11.2 percent and a beta of 0.90.

How much money will you invest in stock Y? (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))

What is the beta of your portfolio? (Round your answer to 3 decimal places. (e.g., 32.161))

You have $100,000 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 percent. Stock X has an expected return of 14.8 percent and a beta of 1.35, and Stock Y has an expected return of 11.2 percent and a beta of 0.90.

Explanation / Answer

This is a math problem. Let x = $amt of Stock X and y = $amt of Stock Y.

x + y = 10000
1.148x + 1.112y = 1.7 * 10000 = 11700
Substituting y = 10000 - x in the second equation,
1.148x + 1.112(10000 - x) = 11700
1.148x + 11120 - 1.112x = 11700
.036x = 580
x = $ 16,111.11
(a) Therefore y = -$ 6,111.11

(b)beta = 1.6111*1.35-.6111*.9 = 1.625 ( portfofio)

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