You want to create a portfolio equally as risky as the market, and you have $500

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: Asset Investment Beta Stock A $ 140,000 .85 Stock B $ 140,000 1.30 Stock C 1.45 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).) 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=140000/500000=.28

Weight of stock B=140000/500000=.28

Beta of portfolio is 1 as it is as risky as the market

So beta of portfolio is

1=.28×.85+.28×1.30+w of c ×1.45

Weight of c =.274483

Investment in stock c=.274483×500000

=$137241.38

2. Investment in risk free asset=500000-140000-140000-137241.38

=$ 82758.62

$82748

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