Question

5. You have $1,000 and want to create a portfolio that is twice as risky as the market. Given this information, fill in the rest of the following table (show your work to receive credit): [10 points] Asset Investment Amount Beta Expected Return Stock A $300 2.3 11% Stock B ? 2.7 13% Risk-free Asset ? ? 3% Portfolio $1,000 ? ?

Answer 1

Beta of Risk Free Asset is 0. Beta of Market is 1. Therefore, Portfolio Beta should be 2.

Lets Assume, Amount invested in B is x. Therefore, Amount Invested in Risk Free Asset will be 1000-300-x = 700-x

Portfolio Beta = Weighted Average Beta

2 = [(300*2.3)+(x*2.7)+((700-x)*0)]/1000

2000 = 690+2.7x

Therefore, Amount Invested in Stock B = x = (2000-690)/2.7 = $485.19

Therefore, Amount Invested in Risk Free Asset = 700-x = 700-485.19 = $214.81

Portfolio Beta = 2

Portfolio Return = Weighted Average Return = [(300*11)+(485.19*13)+(214.81*3)]/1000 = 10251.9/1000 = 10.2519%