You want to create a portfolio equally as risky as the market, and you have $500
ID: 2635086 • Letter: Y
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:
How much will you invest in Stock C? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Investment in Stock C = ?
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 is?
Asset Investment Beta Stock A $120,000 .80 Stock B $150,000 1.15 Stock C 1.40 Risk-Free AssetExplanation / Answer
beta of the market = 1
beta of risk-free asset = 0
Stock A weights = 120,000/500,000 = 0.24
Stock B weights = 150,000/500,000 = 0.3
Stock C weights = a/500,000
Risk-Free Asset weights = (500,000-120,000-150,000-a)/500,000 = (230,000-a)/500,000
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0.24*0.8 + 0.3*1.15 + a/500,000*1.40 + (230,000-a)/500,000*0 = 1
a = 165,357.14
Thus, Investment in Stock C = 165,357.14
Investment in Risk-Free Asset = 230,000 - 165,357.14 = 64,642.86
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