You want to create a portfolio equally as risky as the market, and you have $1,0
ID: 2704479 • Letter: Y
Question
You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, what is the amount of investment in market index mutual fund? What is the amount of investment in risk-free asset?
Asset
Investment
Beta
Stock A
$200,000
0.8
Stock B
$550,000
1.2
Market index mutual fund
??
?
Risk-free asset
??
?
Asset
Investment
Beta
Stock A
$200,000
0.8
Stock B
$550,000
1.2
Market index mutual fund
??
?
Risk-free asset
??
?
Explanation / Answer
beta for market index mutual fund will be 1.00 and also beta for risk free asset willbe 0
for a portfolio equally as risky as the market beta should be equal to 1.00 for whole portfolio
let funds invested in Market index mutual fund be X and funds invested in Risk-free asset be Y
.1 = ($200,000*0.8 + $550,000*1.2 + X*1.0 + Y*0.0)/$1,000,000
X= $1,000,000 - ($200,000*0.8 + $550,000*1.2 )
X = $1,000,000 - $160,000 - $660,000
X = $180,000
THEN
Y = $1,000,000 - $200,000 - $550,000 - $180,000
Y = $70,000
funds invested in Market index mutual fund is $180,000 and funds invested in Risk-free asset is $70,000.
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