Question
In: Finance
You want to create a portfolio equally as risky as the market, and you have $1,300,000...
|
You want to create a portfolio equally as risky as the market, and you have $1,300,000 to invest. Consider the following information: |
| Asset | Investment | Beta |
| Stock A | $325,000 | 0.65 |
| Stock B | $455,000 | 1.20 |
| Stock C | 1.40 | |
| Risk-free asset | ||
| Required: |
| (a) | What is the investment in Stock C? (Do not round your intermediate calculations.) |
| (Click to select) $387,679 $403,186 $372,172 $368,295 $293,164 |
| (b) | What is the investment in risk-free asset? (Do not round your intermediate calculations.) |
| (Click to select) $137,614 $125,705 $132,321 $127,028 $226,836 |
Solutions
Expert Solution
Ans:
(a) As per question, portfolio will have market risk. Market will have risk of 1, it means portfolio beta is equal to 1
Risk free return = 0 = Beta
Weight of stock A = $ 325,000 / $ 1,300,000 = 0.25
Weight of stock B = $ 455,000 / $ 1,300,000 = 0.35
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
1 = 0.25 * 0.65 + 0.35* 1.2 + Weight of stock C * 1.4
1 = 0.1625 + 0.42 + Weight of stock C * 1.4
Weight of stock C * 1.4 = 1 - 0.1625 - 0.42
Weight of stock C * 1.4 = 0.4175
Weight of stock C = 0.4175 / 1.4
Weight of stock C = 0.2982
Investment in stock C = Weight of stock C * Total investment
= 0.2982 * $ 1,300,000
= $ 387,679
(b) Total investment = investment in stock A + investment in stock b + investment in stock c + risk free investmen
$ 1,300,000 = $ 325,000 + $ 455,000 + $ 387,679 + risk free investment
Risk free investment = $ 132,321
jeff jeffy answered 1 week agoRelated Solutions
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