You have $124,000 to invest in a portfolio containing Stock X and Stock Y. Your
ID: 2780157 • Letter: Y
Question
You have $124,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 16.6 percent. Stock X has an expected return of 14.2 percent and a beta of 1.28, and Stock Y has an expected return of 6.2 percent and a beta of 1.02.
How much money will you invest in stock Y? (Do not round intermediate calculations. A negative amount should be indicated by a minus sign.)
Investment in Stock Y ____
What is the beta of your portfolio?
Beta of the portfolio ____
How much money will you invest in stock Y? (Do not round intermediate calculations. A negative amount should be indicated by a minus sign.)
Investment in Stock Y ____
What is the beta of your portfolio?
Beta of the portfolio ____
Explanation / Answer
Let weight of Stock X = Wx
0.142 * Wx + 0.062 * (124,000 - Wx) = 20,584
0.142 * Wx + 7,688 - 0.062 * Wx = 20,584
0.142 * Wx - 0.062 * Wx = 12,896
0.08 * Wx = 12,896
Wx = 12,896/ 0.08
Wx = 161,200
WY = 124,000 - 161,200
WY = -37,200
Investor will short Stock Y
Beta of the portfolio = 161,200/ 124,000 * 1.28 - 37,200/ 124,000 * 1.28
Beta of the portfolio = 1.664 - 0.306
Beta of the portfolio = 1.3580
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