Question
In: Accounting
You want to create a portfolio equally as risky as the market, and you have $1,100,000...
|
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.) |
Solutions
Expert Solution
| 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 | ||
ekkarill92 answered 9 months agoRelated Solutions
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