ANSWER IS NOT $53,550. You have $112,000 to invest in a portfolio containing Sto

Question

ANSWER IS NOT $53,550.

You have $112,000 to invest in a portfolio containing Stock X, Stock Y, and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 12 percent and that has only 76 percent of the risk of the overall market. If X has an expected return of 31 percent and a beta of 2.1, Y has an expected return of 18 percent and a beta of 1.3, and the risk-free rate is 6 percent, how much money will you invest in Stock Y? (Do not round intermediate calculations. Round your answer to the nearest whole dollar.)

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ANSWER IS NOT $53,550.

You have $112,000 to invest in a portfolio containing Stock X, Stock Y, and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 12 percent and that has only 76 percent of the risk of the overall market. If X has an expected return of 31 percent and a beta of 2.1, Y has an expected return of 18 percent and a beta of 1.3, and the risk-free rate is 6 percent, how much money will you invest in Stock Y? (Do not round intermediate calculations. Round your answer to the nearest whole dollar.)

Explanation / Answer

Answer:

E(Rp)=0.12=(Wx*0.31)+(Wy*0.18)+(1-Wx-Wy)*0.06

0.12=0.31 Wx+0.18 Wy+0.06-0.06Wx-0.06Wy

0.06=0.25Wx+0.12Wy eq-1

Bp=0.76=Wx*2.1+Wy*1.3+(1-Wx-Wy)*0

0.76=2.1 Wx+1.3 Wy eq-2

Two equations, two unknowns

Wy=0.876712

Amount inveested in stock y=0.876712*112000=98192

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