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You want to compile a $1,000 portfolio which will be invested in Stocks A and B...

You want to compile a $1,000 portfolio which will be invested in Stocks A and B plus a risk-free asset. Stock A has a beta of 1.2 and Stock B has a beta of .7. If you invest $300 in Stock A and want a portfolio beta of .9, how much should you invest in Stock B?

$700.00

$268.40

300.00

$771.43

$608.15

Solutions

Expert Solution

$771.43
Beta of risk free asset is 0
Statement showing computations
Particulars Amount Invested Weight Beta Portfolio Beta
Stock A                       300.00                                                    0.30                             1.20                       0.36
Stock B W                             0.70
Risk free Asset .70-w                                  -  
                   1,000.00
.9 = 1.2*.3 + .70*w
.90 = .36 +.70w
.54 = .70w
.54/.70 =w
Weight = .7714
Stock B = 100*.7714
Stock B=771.43
Risk free asset = 700 - 771.43=-71.43

jeff jeffy answered 2 years ago
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