Question
In: Finance
You want to create a portfolio equally as risky as the market, and you have $1,100,000...
|
You want to create a portfolio equally as risky as the market, and you have $1,100,000 to invest. Consider the following information: |
| Asset | Investment | Beta |
| Stock A | $275,000 | 0.70 |
| Stock B | $275,000 | 1.35 |
| Stock C | 1.55 | |
| Risk-free asset | ||
| Required: |
| (a) | What is the investment in Stock C? (Do not round your intermediate calculations.) |
| (Click to select) $359,807 $328,670 $345,968 $214,334 $332,129 |
| (b) | What is the investment in risk-free asset? (Do not round your intermediate calculations.) |
| (Click to select) $212,193 $195,871 $335,666 $204,032 $193,830 |
Solutions
Expert Solution
Weight of Stock A = Investment in Stock A / Total
Investment
Weight of Stock A = $275,000 / $1,100,000
Weight of Stock A = 0.25
Weight of Stock B = Investment in Stock B / Total
Investment
Weight of Stock B = $275,000 / $1,100,000
Weight of Stock B = 0.25
Let Weight of Stock C be x
Weight of Stock A + Weight of Stock B+ Weight of Stock C +
Weight of Risk-free Asset = 1
0.25 + 0.25 + x + Weight of Risk-free Asset = 1
Weight of Risk-free Asset = 0.50 - x
Portfolio Beta = Weight of Stock A * Beta of Stock A + Weight of
Stock B * Beta of Stock B + Weight of Stock C * Beta of Stock C +
Weight of Risk-free Asset * Beta of Risk-free Asset
1.00 = 0.25 * 0.70 + 0.25 * 1.35 + x * 1.55 + (0.50 - x) *
0.00
1.00 = 0.1750 + 0.3375 + x * 1.55
1.00 = 0.5125 + x * 1.55
x * 1.55 = 0.4875
x = 0.314516
Weight of Stock C = 0.314516
Investment in Stock C = Weight of Stock C * Total
Investment
Investment in Stock C = 0.314516 * $1,100,000
Investment in Stock C = $345,968
Weight of Risk-free Asset = 0.50 - 0.314516
Weight of Risk-free Asset = 0.185484
Investment in Risk-free Asset = Weight of Risk-free Asset *
Total Investment
Investment in Risk-free Asset = 0.185484 * $1,100,000
Investment in Risk-free Asset = $204,032
jeff jeffy answered 5 months agoRelated Solutions
You want to create a portfolio equally as risky as the market, and you have $1,100,000...
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