Question

You have invested $51,193 portfolio in three securities. The three securities comprise of the risk-free asset, Stock A, and Stock B. The beta of stock A is 2.3 while the beta of stock B is 0.7. 25% of the portfolio is invested in the risk-free security. What is the dollar amount invested in stock B if the beta of the portfolio is 1.2?

Answer 1

Fisk free asset has zero beta, so the beta of the portfolio = 1.2 comprised only of stock B and C which is equal to 75% of tot investment.

51193*0.75= 38394.75$

So if we follow different permutations and combinations, we can see that more allocation is done to B stock having lesser beta than A in order to have a low portfolio beta.

If 65% money is invested in B and 35% in A.

We will get = 2.3*0.35 + 0.7*.65= 1.2 as portfolio beta.

So money invested in B = 0.65*38394.75= 24956$