Question

26 and multiply that with $100,000. (eg if it is L1F18BBAM026 then multiply 26 with $100,000) This is your total investment in a portfolio that has stock X and stock Y. Your goal is to create a portfolio that has an expected return equal to 17 percent. If Stock X has an expected return of 14.8 percent and a beta of 1.35, and Stock Y has an expected return of 11.2 percent and a beta of .90, how much money will you invest in Stock Y? How do you interpret your answer? What is the beta of your portfolio? comment on the systematic risk of your portfolio.

Answer 1

Solution :-

Portfolio Required Return = 17%

Expected Return of Stock X = 14.8%

Expected Return of Stock Y = 11.2%

Now assume weight of Stock X be X

therefore weight of Stock Y be ( 1 - X )

now

X * 14.8% + ( 1 - X ) * 11.2% = 17%

14.8% X + 11.2% - 11.2% X = 17%

3.6% X = 5.8%

X = 5.8% / 3.6% = 161.11%

Now ( 1 - X ) = -61.11%

Amount shorted in Stock Y = $100,000 * 26 *- 61.11% = $1,588,886.00

Beta of Portfolio = ( 161.11% * 1.35 ) + ( - 61.111% * 0.90 )

= 1.625

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