You have a total of $40,000 to invest in Stock A, Stock B and a risk...

You have a total of $40,000 to invest in Stock A, Stock B and a risk free asset. You must invest all of your money. Your objective is to construct a portfolio that has an expected return of 11% and is only 75% as risky as the overall market. If Stock A has a beta of 1.4 and an expected return of 16%, Stock B has a beta of 1.1 and an expected return of 15%, and the risk free rate is 2%, how much money will you invest in the risk free asset?

Expert Solution

Calculating The weights of each stock and Risk free asset. it means the amount that to be investment in them. The equations are as follows

x + y + z = 1
1.4 x + 1.1 y = 0.75
16 x + 15 y + 2 z = 11

Solution, x = -0.05357 ; y = 0.75 ; z = 0.3036

Step 6: solve for x by substituting y = 0.75 and z = 0.3036 into the rst equation.

Using the Above weights, the amount to be invested in each security is 40000*(-.05357)= 2142.80 is to be sold of Stock A

40000*.75=30000 to be invested in Stock B

40000*.3036=12144 to be invested in Risk Free security

ekkarill92 answered 1 year ago

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