You want to create a portfolio equally as risky as the market, and you have $500
ID: 2714877 • 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:
Risk-free asset
Requirement 1:
How much will you invest in Stock C? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
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).)
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:
Asset Investment Beta Stock A $ 131,000 .76 Stock B $ 149,000 1.21 Stock C 1.36Risk-free asset
Requirement 1:
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 $ Requirement 2: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 $Explanation / Answer
Weight of stock A= 131000 / 500000 = .262
Weight of Stock B = 149000 / 500000 = .298
Let the weight of stock C be "X"
So weight of risk free asset = 1 - .262 - .298 -X= .44 - X
Beta of overall market be 1
Weighted average beta =beta of market
(.76*.262)+(.298 *1.21 ) +(1.36 X) +[(.44-X )*0] = 1
.19912 + .36058 + 1.36X + 0 = 1
.5597 + 1.36X = 1
1.36X = 1- .5597
1.36 X = .4403
X (weight of stock C= ) = .4403 /1.36
= .32375
Investment in stock C = .32375 *500000 = $ 161875
Investment in risk free asset = (.44 - .32375 ) *500000
= .11625 *500000
= $ 58125
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