You want to create a portfolio equally as risky as the market, and you have $2,4

Question

You want to create a portfolio equally as risky as the market, and you have $2,400,000 to invest. Given this information, fill in the rest of the following table: (Do not round intermediate calculations. Round your answers to the nearest whole number, e.g., 32.)

You want to create a portfolio equally as risky as the market, and you have $2,400,000 to invest. Given this information, fill in the rest of the following table: (Do not round intermediate calculations. Round your answers to the nearest whole number, e.g., 32.)

Explanation / Answer

Beta of market = 1

Beta of risk free asset = 0     [as there is no risk involved ,beta= 0]

Weight of stock A = 360,000 / 2,400,000 = .15

STOCK B = 624,000 / 24,000,000 = .26

let weight of stock C =X

Weight of risk free asset = 1 - .15 -.26 -X = .59-X

beta of market =weighted average of stock

1 = (1* .15 )+(1.1 * .26 )+(1.20*X ) + [0 * (.59-x)]

1 = .15 + .286 + 1.20X + 0

1 = .436 + 1.20X

   1.20X = 1 - .436

    X = .564 / 1.20

       = .47

weight of stock C= .47

Weight of risk free asset = .59 -.47 = .12

Investment in stock C= 2,400,000 * .47 =$ 1128000

risk free asset = 2,400,000 * .12 =$ 288000

Beta of risk free asset = 0

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.