You want to create a portfolio equally as risky as the market,and you have $1,000,000...

You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fill in the rest of the following table:

Asset	Investment	Beta
Stock A	180,000	0.85
Stock B	290,000	1.40
Stock C		1.45
Risk free-rate

Solutions

Expert Solution

The amount in stock c is computed as follows:

Beta of stock A x weight of stock A + Beta of stock B x weight of stock B + Beta of Stock C x weight of stock C + Beta of risk free asset x Weight of risk free asset = Beta of market

0.85 x $ 180,000 / $ 1,000,000 + 1.40 x $ 290,000 / $ 1,000,000 + 1.45 x weight of stock C + 0 = 1

0.153 + 0.406 + 1.45 x Amount invested in stock C / $ 1,000,000 = 1

1.45 x Amount invested in stock C / $ 1,000,000 = 0.441

Amount invested in stock C = (0.441 x $ 1,000,000) / 1.45

Amount invested in stock C = $ 304,137.931

So, the amount of investment in risk free asset shall be:

= $ 1,000,000 - $ 180,000 - $ 290,000 - $ 304,137.931

= $ 225,862.069

The beta of risk free asset is always zero.

jeff jeffy answered 1 year ago

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