Analyzing a Portfolio You have $100,000 to invest in a portfolio containing Stock X and Stock...

Analyzing a Portfolio You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 12.7 percent.

If Stock X has an expected return of 11.4 percent and a beta of 1.25 and Stock Y has an expected return of 8.68 percent and a beta of .85,

how much money will you invest in Stock Y?

How do you interpret your answer?

What is the beta of your portfolio?

Solutions

Expert Solution

a)Let the weight of stock X be "a" so weight of stock Y = 1-a

Expected return of portfolio = [Return X*weight of X]+[Return Y*weight of Y]

12.7 = [11.4* *a]+[8.68*(1-a)]

12.7 = 11.4 a + 8.68 - 8.68a

12.7 -8.68 = 2.72 a

4.02= 2.72a

a = 4.02/2.72 = 1.47794 or 147.794%

weight of X = 147.794%

weight of Y= 1-1.47794 = - .47794 or -47.794%

Investment in X = 100000*147.794% = 147794

Investment in Y = 100000*-47.794% = - 47794

b)in order to have expected return of 12.7% ,you need to invest 147794 in stock X and selling (divest) in stock Y by -47794

c)Beta of portfolio =[ 1.25*147.794%]+[.85*-47.794%]

= 1.8474 +(-.4062)

= 1.8474 - .4062

= 1.4412

jeff jeffy answered 1 year ago

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