You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your

Question

You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 12.90 percent. Stock X has an expected return of 11.20 percent and a beta of 1.30, and Stock Y has an expected return of 7.70 percent and a beta of .80. How much money will you invest in stock Y? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) Investment in Stock Y $ 11428.57 What is the beta of your portfolio? (Do not round intermediate calculations and round your answer to 3 decimal places. (e.g., 32.161)) Portfolio beta

Explanation / Answer

a.

Let the weight of amount invested in Stock Y is Y and weight of amount invested in stock X is 1-Y.

Expected return of Stock X = 11.20%

Expected return of stock Y = 7.70%

Required expected return of portfolio = 12.90%

Hence, 12.90 = 11.20*(1-Y) + 7.70*Y

12.90 = 11.20 – 11.20*Y + 7.70*Y

11.20*Y – 7.70*Y = 11.20 – 12.90

3.5*Y = -1.7

y = -1.7/3.5 = -0.48571

Weight of X = 1 – (-0.48571) = 1.48571

Hence, Stock Y is to be sold worth $100,000*0.48571 = $48,571

Amount to be invested in Stock X = $100,000 + $48,571 = $148,571

b.

Portfolio Beta = (1.30*1.48571) + (0.80*-0.48571) = 1.54

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

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