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?

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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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