In: Accounting
You want to create a portfolio equally as risky as the market, and you have $1,100,000 to invest. Consider the following information: |
Asset | Investment | Beta |
Stock A | $275,000 | 0.60 |
Stock B | $220,000 | 1.25 |
Stock C | 1.45 | |
Risk-free asset | ||
Required: |
(a) | What is the investment in Stock C? (Do not round your intermediate calculations.) |
(b) | What is the investment in risk-free asset? (Do not round your intermediate calculations.) |
a. | Investment in stock C | = | $ 4,55,172 | |
b. | Investment in stock Risk - free - assets | = | $ 1,49,828 | |
Workings: | ||||
Asset | Investment | Beta | Weight | |
(i) | (ii) | (i)*(ii) | ||
Stock A | $ 2,75,000 | 0.6 | $ 1,65,000 | |
Stock B | $ 2,20,000 | 1.25 | $ 2,75,000 | |
Stock C | X | 1.45 | 1.45 X | |
Risk - free - assets | 0 | 0 | ||
Total | $ 11,00,000 | 0 | ||
$165000 + $275000 + 1.45X | ||||
*Beta of risk - free - assets is zero | ||||
Also | ||||
$ 11,00,000 | = | ($165000 + $275000 + 1.45X) | ||
1.456 X | = | $ 6,60,000 | ||
X | = | $ 4,55,172 | ||
Stock C | = | $ 4,55,172 | ||
Risk - free - assets | ||||
Total stock value | = | $ 11,00,000 | ||
Less: | Stock A | = | $ 2,75,000 | |
Less: | Stock B | = | $ 2,20,000 | |
Less: | Stock C | = | $ 4,55,172 | |
Risk - free - assets | = | $ 1,49,828 |