You have $91471 to invest in two stocks and the risk-free security. Stock A has an...

You have $91471 to invest in two stocks and the risk-free security. Stock A has an expected return of 10.99 percent and Stock B has an expected return of 11.09 percent. You want to own $29063 of Stock B. The risk-free rate is 3.76 percent and the expected return on the market is 12.08 percent. If you want the portfolio to have an expected return equal to that of the market, how much should you invest (in $) in the risk-free security? Answer to two decimals. (Hint: A negative answer is OK - it means you borrowed (rather than lent or invested) at the risk free rate.)

Expert Solution

a	Total funds to be invested	91471
b	Investmnent in stock B	29063
c	Investment in stock A & and the risk-free security	62408
	(a-b)

	Assume x to be the percentage of $62408 to be invested in Stock A

	expected return on the market


	=

	(Return on stock "A" * Amount to be invested in Stock A) + (Return on risk-free security * Amount to be invested risk-free security) + (Return on stock "B" * Amount to be invested in Stock B)
	Total funds to be invested


	12.08	=	(10.99 * 62408 * x) + (3.76 * 62408 * (1-x) + 29063 * 11.09
			91471

			685863.92	-234654.08	234654.1


	12.08		=685863.92x + 234654.1 - 234654.1x + 322308.7
			91471


	548006.88		=451209.84 x

	x		1.21
	1-x		-0.21

	Amount to be invested in risk free security		=62408* (-0.21)

			-13105.68

jeff jeffy answered 1 year ago

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