Question

In: Finance

You would like to combine a risky stock with a beta of 1.87 with U.S. Treasury...

You would like to combine a risky stock with a beta of 1.87 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in the risky stock?

Group of answer choices

1- 54.15%

2- 55.09%

3- 52.91%

4- 53.48%

5- 54.67%

Solutions

Expert Solution

In order to have risk equivalent to overall market, the resultant portfolio should have a beta of 1.

Beta of a portfolio is weighted average of the beta of individual portfolio constituents.

Assume percentage of portfolio in risky stock to be w. So, percentage in risk free asset would be 1 - w

1 = w * 1.87 + (1 - w) * 0

1 = w * 1.87

w = 0.5348

w = 53.48%

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

you would like to combine a risky stock with a beta of 1.68 with U.S. Treasury...
you would like to combine a risky stock with a beta of 1.68 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury bills? a) .32 b).40 c).50 d).60 e) .68
You combine N risky assets to form an optimal risky asset and achieve a Sharpe Measure...
You combine N risky assets to form an optimal risky asset and achieve a Sharpe Measure S.  If there is now a new asset with a negative Jensen Measure, you could combine the N+1 assets to achieve a Sharpe Measure larger than S. TRUE or FALSE (briefly explain)
You invest 50% in a risky portfolio, and 50% in a treasury bill. The risky portfolio...
You invest 50% in a risky portfolio, and 50% in a treasury bill. The risky portfolio has an expected return of 15% and a standard deviation of 25%. The treasury bill pays 7%. Suppose that your risky portfolio includes the following investments in the given proportions: Stock A 30% Stock B 30% Stock C 30% Stock D 10%. a.) What are the investment proportions in the complete portfolio, including stock A, B, C, D and the Treasury bill? b.) What...
You invest 50% in a risky portfolio, and 50% in a treasury bill. The risky portfolio...
You invest 50% in a risky portfolio, and 50% in a treasury bill. The risky portfolio has an expected return of 15% and a standard deviation of 25%. The treasury bill pays 7%. Suppose that your risky portfolio includes the following investments in the given proportions: Stock A 30% Stock B 30% Stock C 30% Stock D 10% What are the investment proportions in the complete portfolio, including stock A, B, C, D and the Treasury bill & What is...
Linke Motors has a beta of 1.30, the rate on U.S. Treasury securities is 6.5%. The...
Linke Motors has a beta of 1.30, the rate on U.S. Treasury securities is 6.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 10.75%. Based on the SML, what is the firm's required return? Do not round your intermediate calculations. Group of answer choices 12.03% 14.79% 14.43% 9.86% 14.31%
What is the risk premium for a stock that has a Beta of 2.5, while treasury...
What is the risk premium for a stock that has a Beta of 2.5, while treasury bills are yielding 1% and the return on the market portfolio is 11%?
The common stock of CORPORATION X has a beta of 0.9. The Treasury bill rate is...
The common stock of CORPORATION X has a beta of 0.9. The Treasury bill rate is 4%, and the market risk premium is estimated at 8%. CORPORATION X capital structure is 27% debt, paying an interest rate of 6%, and 73% equity. The debt sells at par. CORPORATION X pays tax at 40%. What is BCCI’s cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place. What is its WACC?...
Your portfolio has a beta of 1.25. The portfolio consists of 17 percent U.S. Treasury bills,...
Your portfolio has a beta of 1.25. The portfolio consists of 17 percent U.S. Treasury bills, 29 percent in stock A, and 54 percent in stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of stock B? How can I use Excel to Find Beta?
You would like to speculate on a rise in the price of a certain stock. The...
You would like to speculate on a rise in the price of a certain stock. The current stock price is RM25, and a three-month call option with a strike price of RM30 costs RM2.5. You have RM1,000 to invest. Identify two alternative strategies, one involving an investment in stock and the other involving investment in option. What are the potential gain and losses from each?
You would like to speculate on a rise in the price of a certain stock. The...
You would like to speculate on a rise in the price of a certain stock. The current stock price is $40 and a three-month call with a strike price of $42 costs $2.50. You have $5,000 to invest. Identify two alternative strategies. Outline the advantages and disadvantages of each.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT