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 $ 142,000 .87 Stock B $ 138,000 1.32 Stock C 1.47 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

Since the portfolio is as risky as the market, the of the portfolio must be equal to one.

Let X and Y is weight of C and Risk free security (RF)

Beta of Rf =0

Above table In equation to get value of X.

1 =.24708+.36432+147X+0

=X =26.44%

Ie Weight of stock C =26.44%

weight of Risk free Security =100%-28.4%-27.60%-26.44% =17.56%

How much will you invest in Stock C =132177

How much will you invest in the risk-free asset? =87823

Weight Beta Weighted beta A 0.284 0.87 0.24708 B 0.276 1.32 0.36432 C X 1.47 1.47X Rf Y 0 0 Beta Of Potfolio 1

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