Currently, your portfolio consists of $3,000 invested in share A with a beta of 0.7 and...

Currently, your portfolio consists of $3,000 invested in share A with a beta of 0.7 and $4,000 in share B with a beta of 0.5. You have another $12,000 to invest and want to divide it between share C with a beta of 1.3 and a risk-free asset. You want your portfolio beta to be 0.9. How much (to the nearest dollar) should you invest in the risk free asset?

a. 2,000

b. 10,000

c. $3,000

d.8,800

Expert Solution

Total portfolio beta is weighted average beta of stocks.

Beta of risk free asset will always be equal to zero whereas, let weight of stock C be X

.9=( 3000*.7)+(4000*.5)+(1.3X)+((12000-X)*0)/(3000+4000+12000)

17100-4100= 1.3X

X=10,000

Investment in Risk free asset= (12000-10000)= 2000

Correct answer is option (A)$2000

jeff jeffy answered 2 years ago

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