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

Solutions

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

Next > < Previous

Related Solutions

Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.5 and...

Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.5 and $300,000 invested in a stock that has a beta of 0.8. The risk-free rate is 6% and the market risk premium is 5%. Which of the following statements is CORRECT? Answers: a. The portfolio's required return is less than 11%. b. If the risk-free rate remains unchanged but the market risk premium increases by 2%, Gretta's portfolio's required return will increase by more than...

The total value of your portfolio is $10,000: $3,000 of it is invested in Stock A...

The total value of your portfolio is $10,000: $3,000 of it is invested in Stock A and the remainder invested in Stock B. Stock A has a beta of 0.8; Stock B has a beta of 1.2. The risk premium on the market portfolio is 8%; the risk-free rate is 2%. Additional information on Stocks A and B is provided below. Return in Each State State Probability of State Stock A Stock B Excellent 15% 15% 5% Normal 50% 9%...

Johnny's portfolio consists of $100,000 invested in a stock which has a beta = 0.9, $150,000...

Johnny's portfolio consists of $100,000 invested in a stock which has a beta = 0.9, $150,000 invested in a stock which has a beta = 1.2, and $50,000 invested in a stock which has a beta = 1.5. The risk-free rate is 4 percent. Last year this portfolio had a required rate of return of 13 percent. This year nothing has changed except for the fact that the market risk premium has decreased by 2 percent (This year market risk...

You own a large share portfolio. Currently 40% of this portfolio is invested in two small...

You own a large share portfolio. Currently 40% of this portfolio is invested in two small IT companies where you own, in each case, about 20% of each company. The rest (60%) of your share portfolio is invested in 6 large mining companies quoted on both the London and Frankfurt stock exchanges. Your share holdings in these 6 companies are a tiny proportion their market capitalization. Explain the risks arising from your portfolio composition and comment on how you might...

This is so hard especially the BETA portfolio I cannot calculate. Your investment portfolio consists of...

This is so hard especially the BETA portfolio I cannot calculate. Your investment portfolio consists of the following stocks Investment Portfolio Name Price Beta # shares Dow Chemical $ 59.72 1.34 15,000 Walmart $ 69.32 0.19 3,000 Boeing $ 128.00 1.36 8,000 Verizon $ 52.61 0.45 6,000 Consolidated Edison $ 74.00 0.17 3,000 Caterpillar $ 75.00 1.5 13,000 Deutsche bank $ 22.55 1.4 9,000 a) What is the portfolio beta? b) What is the required return on the portfolio if the...

Your portfolio has a beta of 1.25. The portfolio consists of 17 percent U.S. Treasury bills,...

Your portfolio has a beta of 1.25. The portfolio consists of 17 percent U.S. Treasury bills, 29 percent in stock A, and 54 percent in stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of stock B? How can I use Excel to Find Beta?

PORTFOLIO BETA An individual has $45,000 invested in a stock with a beta of 0.8 and...

PORTFOLIO BETA An individual has $45,000 invested in a stock with a beta of 0.8 and another $30,000 invested in a stock with a beta of 2.5. If these are the only two investments in her portfolio, what is her portfolio's beta? Round your answer to two decimal places.

Assume that you have a portfolio (P) with $1,000 invested in Stock A and $3,000 in...

Assume that you have a portfolio (P) with $1,000 invested in Stock A and $3,000 in Stock B. You also have the following information on both stocks: Stock A Stock B ________________________________________________________ Expected Return (A) 0.15 (B) 0.24 Standard Deviation (A) 0.16 (B) 0.20 The covariance between A and B is - .0256 1)Draw a graph and demonstrate the effect that diversification would have on the portfolio return curve if you were to combine stocks A and B in different...

Your $100 million bond portfolio has currently $90 million invested in bonds and the remainder invested...

Your $100 million bond portfolio has currently $90 million invested in bonds and the remainder invested in T bills. The duration of the bond component is 5.2 years. Assume that the T bond futures contract has a duration of 7.8 years and a value of $102,500 per contract Q) How many futures contracts should be purchased or sold to change your portfolio's duration to 6.0 years? and How many futures contracts should be purchased or sold in order to make...

A portfolio consists of 50% invested in Stock X and 50% invested in Stock Y. We...

A portfolio consists of 50% invested in Stock X and 50% invested in Stock Y. We expect two probable states to occur in the future: boom or normal. The probability of each state and the return of each stock in each state are presented in the table below. State Probability of state Return on Stock X Return on Stock Y Boom 20% 25% 35% Normal 80% 10% 5% What are the expected portfolio return and standard deviation? Select one: a....

Subjects