Question
In: Finance
You want to create a portfolio equally as risky as the market, and you have $1,200,000...
You want to create a portfolio equally as risky as the market, and you have $1,200,000 to invest. Consider the following information:
Asset Investment Beta
Stock A $240,000 0.60
Stock B $360,000 1.25
Stock C 1.60
Risk-free asset Required:
(a) What is the investment in Stock C? (Do not round your intermediate calculations.)
(b) What is the investment in risk-free asset? (Do not round your intermediate calculations.)
Solutions
Expert Solution
- We need to understand that the beta of market portfolio is 1 and that of the risk free asset is 0
- We have a total of 1200000 to invest of which we have already
made the following investments:
-
Security Investment Beta Stock A 240,000 0.60 Stock B 360,000 1.25 Stock C Need to find out 1.60 Risk Free Asset Need to find out 0 -
Let's assume the amount invested in Stock C is x so the remaining amount will be invested in Risk free asset which will be 1,200,000-240,000-360,000-x
-
Portfolio Beta should equal 1 and is basically a weighted average beta of the asset betas
-
Now we need to solve the following equation:
-
-
-
-
So the investment in stock C was 378,750
-
Therefore the investment in risk free asset = 1,200,000-240,000-360,000-378,750 = 221,250
-
jeff jeffy answered 1 year agoRelated Solutions
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You want to create a portfolio equally as risky as the market, and you have $1,000,000...
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You want to create a portfolio as risky as the market with $500,000 to invest. Fill...
You want to create a
portfolio as risky as the market with $500,000 to invest. Fill in
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Riskfree asset _______
------
Please fill in the
blanks and show all work
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